Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For
the quarterly period ended June 30, 2009

Or

o

Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934

For
the transition period
from to
.

Commission
File No. 000-24537

DYAX
CORP.

(Exact Name of Registrant as Specified in
its Charter)

DELAWARE

04-3053198

(State of
Incorporation)

(I.R.S. Employer
Identification Number)

300
TECHNOLOGY SQUARE, CAMBRIDGE, MA 02139

(Address of Principal Executive Offices)

(617)
225-2500

(Registrants Telephone Number, including
Area Code)

Indicate by check mark
whether the registrant: (1) has filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES x NO o

Indicate by check mark
whether the registrant has submitted electronically and posted on it corporate
Web site, if any, every Interactive Data File required to be submitted and
posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or such shorter period that the registrant was
required to submit and post such files). YES o NO o

Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See definitions of accelerated filer, large
accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):

Large
accelerated filer o

Accelerated
filer x

Non-accelerated
filer o

Smaller
reporting company o

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). YES o NO x

Number of shares
outstanding of Dyax Corp.s Common Stock, par value $0.01, as of August 2,
2009: 72,471,321

Dyax Corp. (Dyax or the
Company) is a clinical stage biopharmaceutical company focused on the
discovery, development and commercialization of novel biotherapeutics for unmet
medical needs, with an emphasis on inflammatory and oncology indications. Dyax uses its proprietary drug discovery
technology, known as phage display, to identify antibody, small protein and
peptide compounds for clinical development.
This technology has provided an internal pipeline of promising drug
candidates and numerous licenses and collaborators that generate revenues
through funded research, license fees, milestone payments and royalties.

The Company is subject to
risks common to companies in the biotechnology industry including, but not
limited to, risks of preclinical and clinical trials and the regulatory
approval process, dependence on collaborative arrangements, development by its
competitors of new technological innovations, dependence on key personnel,
protection of proprietary technology, and compliance with the United States
Food and Drug Administration (FDA) and other governmental regulations and
approval requirements.

The
accompanying unaudited interim consolidated financial statements have been
prepared by the Company in accordance with accounting principles generally
accepted in the United States of America (GAAP) for interim financial
information and in accordance with instructions to the Quarterly Report on Form 10-Q. It is managements opinion that the
accompanying unaudited interim consolidated financial statements reflect all
adjustments (which are normal and recurring) necessary for a fair statement of
the results for the interim periods. The
financial statements should be read in conjunction with the consolidated
financial statements included in the Companys Annual Report on Form 10-K
for the year ended December 31, 2008.
The accompanying December 31, 2008 consolidated balance sheet was
derived from audited financial statements, but does not include all disclosures
required by GAAP.

The
preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect (i) the reported amounts of
assets and liabilities, (ii) disclosure of contingent assets and
liabilities at the dates of the financial statements and (iii) the
reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those
estimates. The results of operations for the three and six months ended June 30,
2009 are not necessarily indicative of the results that may be expected for the
year ending December 31, 2009. The
Company evaluated all events and transactions that occurred after June 30,
2009 up through August 4, 2009, the date at which the Company issued these
financial statements. During this period
the Company did not have any material recognizable subsequent events.

2.
ACCOUNTING POLICIES

Basis
of Consolidation: The
accompanying consolidated financial statements include the accounts of the
Company and the Companys European research subsidiaries Dyax S.A. and
Dyax BV (formerly known as TargetQuest BV). All inter-company accounts and transactions
have been eliminated.

Use of
Estimates: The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
certain estimates and assumptions that affect the amounts of assets and
liabilities reported and disclosure of contingent assets and liabilities at the
dates of the financial statements and the reported amounts of revenue and
expenses during the reporting periods.
The significant estimates and assumptions in these financial statements
include revenue recognition, accounts receivable collectability, useful lives
with respect to long

Concentration
of Credit Risk: Financial
instruments that potentially subject the Company to concentrations of credit
risk consist principally of cash, cash equivalents, short-term and long-term
investments and trade accounts receivable.
At June 30, 2009 and December 31, 2008, approximately 66% and
89% of the Companys cash, cash equivalents, short-term and long-term
investments were invested in money market funds backed by U.S. Treasury
obligations, U.S. Treasury notes and bills, and obligations of U.S. government
agencies held by one financial institution.
The Company maintains balances in various operating accounts in excess
of federally insured limits.

The Company provides most
of its services and licenses its technology to pharmaceutical and biomedical
companies worldwide. Concentrations of
credit risk with respect to trade receivable balances are usually limited on an
ongoing basis, due to the diverse number of customers comprising the Companys
customer base. As of June 30, 2009,
three customers accounted for 63%, 15% and 9% of the accounts receivable
balance. Two separate customers
accounted for approximately 48% and 35% of the Companys accounts receivable
balance as of December 31, 2008.

Cash
and Cash Equivalents: All highly liquid investments purchased with an
original maturity of ninety days or less are considered to be cash
equivalents. Cash and cash equivalents
consist principally of cash and U.S. Treasury funds.

Investments: Short-term
investments consist of investments with original maturities greater than ninety
days and remaining maturities less than one year when purchased. Long-term investments consist of investments
with remaining maturities of greater than one year. The Company considers its investment
portfolio of investments available-for-sale as defined by Statements of
Financial Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and Equity Securities. Accordingly, these investments are recorded
at fair value, which is based on quoted market prices. As of June 30, 2009, the Companys
short-term investments consisted of U.S. Treasury notes and bills with an
amortized cost of $15.6 million, an estimated fair value of $15.6 million, and
had an unrealized gain of $20,000, which is recorded in other comprehensive
income on the accompanying consolidated balance sheets. As of June 30, 2009, the Companys
long-term investments consisted of a U.S. Treasury bill with an amortized cost
and estimated fair value of $2.5 million and an unrealized loss of $1,000,
which is recorded in other comprehensive income on the accompanying
consolidated balance sheets. As of December 31,
2008, the Companys short-term investments consisted of U.S. Treasury notes and
bills with an amortized cost of $30.6 million, an estimated fair value of
$30.8 million and had an unrealized gain of $153,000, which is recorded in
other comprehensive income on the accompanying consolidated balance
sheets. The Company had no long-term
investments as of December 31, 2008.

Fixed
Assets: Property
and equipment are recorded at cost and depreciated over the estimated useful
lives of the related assets using the straight-line method. Laboratory and
production equipment, furniture and office equipment are depreciated over a
three to seven year period. Leasehold improvements are stated at cost and are
amortized over the lesser of the non-cancelable term of the related lease or
their estimated useful lives. Leased equipment is amortized over the lesser of
the life of the lease or their estimated useful lives. Maintenance and repairs
are charged to expense as incurred. When assets are retired or otherwise
disposed of, the cost of these assets and related accumulated depreciation and
amortization are eliminated from the balance sheet and any resulting gains or
losses are included in operations in the period of disposal.

Intangibles: Intangibles are
recorded at cost and amortized over their estimated useful lives. Effective January 1, 2009, the Company
implemented Financial Accounting Standards Board (FASB) Staff Position
FAS 142-3, Determination of the Useful
Life of Intangible Assets, or FSP FAS 142-3, which amends
SFAS 142 and provides guidance for determining the useful life of a
recognized intangible asset and requires enhanced disclosures so that users of
financial statements are able to assess the extent to which the expected future
cash flows associated with the asset are affected by the Companys intent
and/or ability to renew or extend the arrangement.

Impairment
of Long-Lived Assets: The Company reviews its long-lived assets for
impairment whenever events or changes in business circumstances indicate that
the carrying amount of assets may not be fully recoverable or that the useful
lives of these assets are no longer appropriate. Each impairment test is based
on a comparison of the undiscounted cash flow to the recorded value of the
asset. If an impairment is indicated, the asset is written down to its
estimated fair value on a discounted cash flow basis.

The Company enters into
biopharmaceutical product development agreements with collaborative partners
for the research and development of therapeutic, diagnostic and separations
products. The terms of the agreements
may include non-refundable signing and licensing fees, funding for research and
development, milestone payments and royalties on any product sales derived from
collaborations. Non-refundable signing and licensing fees are recognized as
services are performed over the expected term of the collaboration. Funding for
research and development, where the amounts received are non-refundable is
recognized as revenue as the related expenses are incurred. Milestones that are
based on designated achievement points and that are considered at risk and
substantive at the inception of the collaboration are recognized as earned when
the corresponding payment is considered reasonably assured. The Company
evaluates whether milestones are at risk and substantive based on the
contingent nature of the milestone, specifically reviewing factors such as the
technological and commercial risk that must be overcome and the level of the
investment required. Milestones that are not considered at risk and substantive
are recognized, when achieved, in proportion to the percentage of the
collaboration completed through the date of achievement. The remainder is
recognized as services are performed over the remaining term of the
collaboration. Royalties are recognized when earned. Costs of revenues related
to product development and license fees are classified as research and
development in the consolidated statements of operations and comprehensive
loss.

The Company generally
licenses its patent rights covering phage display as well as its proprietary
phage display libraries on a non-exclusive basis to third parties for use in
connection with the research and development of therapeutic, diagnostic, and
other products. Standard terms of the license patent rights agreements
generally include non-refundable signing fees, non-refundable license
maintenance fees, development milestone payments and royalties on product
sales. Signing fees and maintenance fees are generally recognized ratably over
the term of the agreement. Perpetual patent licenses are recognized immediately
if the Company has no future obligations, the payments are upfront and the
license is non-exclusive. Standard terms of the proprietary phage display
libraries agreements generally include non-refundable signing fees,
non-refundable license maintenance fees, development milestone payments and
royalties on product sales. Signing fees and maintenance fees are generally
recognized ratably over the term of the agreement. Upon the achievement of a
milestone under a phage display license, a portion of the milestone payment
equal to the percentage of the license period that has elapsed is recognized as
revenue. The remainder is recognized over the remaining term of the license
agreement. Milestone payments under these license arrangements are recognized
when the milestone is achieved if the Company has no future obligations under
the license. Royalties are recognized when they are earned.

Payments received that
have not met the appropriate criteria for revenue recognition are recorded as
deferred revenue.

Guarantees: The FASB issued
interpretation No. 45 Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others (FIN 45). The Company has
determined that it is not a party to any agreements that fall within the scope
of FIN 45. The Company generally does not provide indemnification with
respect to the license of its phage display technology. The Company does
generally provide indemnifications for claims of third parties that arise out
of activities that the Company performs under its collaboration, product
development and cross-licensing

activities. The maximum
potential amount of future payments the Company could be required to make under
the indemnification provisions in some instances may be unlimited. The Company
has not incurred any costs to defend lawsuits or settle claims related to any
indemnification obligations under its license agreements. As a result, the
Company believes the estimated fair value of these obligations is minimal. The
Company has no liabilities recorded for any of its indemnification obligations
recorded as of June 30, 2009 and December 31, 2008.

Research
and Development: Research
and development costs include all direct costs, including salaries and benefits
for research and development personnel, outside consultants, costs of clinical
trials, DX-88 drug manufacturing costs, sponsored research, clinical trials
insurance, other outside costs, depreciation and facility costs related to the
development of drug candidates. These costs have been charged to research and
development expense as incurred. Prepaid research and development on the
consolidated balance sheets represents external drug manufacturing costs, and
research and development service costs that have been paid for prior to the
related product being received or the services being performed.

Income
Taxes: The
Company utilizes the asset and liability method of accounting for income taxes
as set forth in SFAS No. 109, Accounting
for Income Taxes (SFAS No. 109). Under this method, deferred
tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
basis of assets and liabilities using the current statutory tax rates. At June 30, 2009 and December 31,
2008, there were no unrecognized tax benefits.

Translation
of Foreign Currencies: Assets and liabilities of the Companys foreign
subsidiaries are translated at period end exchange rates. Amounts included in
the statements of operations are translated at the average exchange rate for
the period. The resulting currency translation adjustments are made directly to
accumulated other comprehensive income (loss) in the consolidated balance
sheets. For the three and six months ended June 30, 2009 and for the six
months ended June 30, 2008, losses from transactions in foreign currencies
were $132,000, $180,000 and $89,000, respectively, and for the three months
ended June 30, 2008, gains from transactions in foreign currencies were
$3,000, all of which are included in the consolidated statements of operations
and comprehensive loss.

Share-Based
Compensation: The
Companys share-based compensation program consists of share-based awards
granted to employees in the form of stock options, as well as its employee
stock purchase plan. The Companys
share-based compensation expense is recorded in accordance with SFAS No. 123
(revised 2004), Share-Based Payments,
or SFAS 123(R).

Net
Loss Per Share: Net
loss per share is computed under SFAS No. 128, Earnings per Share (SFAS 128). Under SFAS 128, the
Company is required to present two EPS amounts, basic and diluted. Basic net
loss per share is computed using the weighted average number of shares of
common stock outstanding. Diluted net loss per share does not differ from basic
net loss per share since potential common shares from the exercise of stock
options or warrants are anti-dilutive for all periods presented and, therefore,
are excluded from the calculation of diluted net loss per share. Stock options
and warrants to purchase a total of 9,689,142 and 8,888,763 shares of common
stock were outstanding at June 30, 2009 and 2008, respectively.

Comprehensive
Income (Loss): The
Company accounts for comprehensive income (loss) under SFAS No. 130, Reporting Comprehensive Income, which
established standards for reporting and displaying comprehensive income (loss)
and its components in a full set of general purpose financial statements. The
statement required that all components of comprehensive income (loss) be
reported in a financial statement that is displayed with the same prominence as
other financial statements.

Business
Segments: The
Company discloses business segments under SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information (SFAS No. 131). The statement established
standards for reporting information about operating segments in annual
financial statements of public enterprises and in interim financial reports
issued to shareholders. It also established standards for

related disclosures about
products and services, geographic areas and major customers. Prior to the closing of the Liege facility in
2008, the Company operated as one business segment in two geographic areas. Subsequent to the closing, the Company
operates as one business segment with one geographic area.

Recent
Accounting Pronouncements: Effective January 1, 2008,
the Company implemented SFAS No. 157, Fair
Value Measurement (SFAS 157), for its financial assets and
liabilities that are remeasured and reported at fair value at each reporting
period, and non-financial assets and liabilities that are remeasured and
reported at fair value at least annually. During 2008, the Company
elected to defer the adoption of SFAS 157 with respect to non-financial assets
and liabilities that are remeasured at fair value on a non-recurring basis
under FSP SFAS 157-2. Effective the first quarter of 2009, the
Company implemented SFAS 157 for its non-financial assets and liabilities
that are remeasured at fair value on a non-recurring basis. The adoption of
SFAS 157 for the Companys non-financial assets and liabilities that are
remeasured at fair value on a non-recurring basis did not affect its financial
position or results of operations; however, it could have an impact in future
periods.

Effective April 1,
2009, the Company adopted APB 28-1 and FASB Staff Position FAS 107-1, Interim Disclosures about Fair Value of Financial
Instruments, which amend FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments,
to require disclosures about fair value of financial instruments in interim as
well as in annual financial statements. FSP FAS 107-1 also amends APB Opinion No. 28,
Interim Financial Reporting, to
require those disclosures in all interim financial statements. The adoption of FSP FAS 107-1 had no impact
on the Companys financial position or results of operations.

Effective January 1,
2009, the Company implemented SFAS No. 141(R), Business Combination which requires an acquiring company to
measure all assets acquired and liabilities assumed, including contingent
consideration and all contractual contingencies, at fair value as of the
acquisition date. In addition, an acquiring company is required to capitalize
in-process research and development and either amortize it over the life of the
product, or write it off if the project is abandoned or impaired. The Company has
not had any business combinations completed after January 1, 2009. Accordingly, the adoption of SFAS 141(R) did
not have an impact on the Companys consolidated financial statements.

Effective April 1,
2009, the Company adopted Financial Accounting Standard 165, Subsequent Events, or FAS 165, which
provides general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued
or are available to be issued. FAS 165
requires disclosure of the date through which management has completed a
subsequent event evaluation for all interim and annual reporting periods.

Effective April 1,
2009, the Company adopted FASB Staff Position FAS 157-4, Determining Whether a Market Is Not Active and a
Transaction Is Not Distressed, or FSP FAS 157-4; FSP
FAS 157-4 which provides guidelines for making fair value measurements
more consistent with the principles presented in SFAS 157. FSP
FAS 157-4, which provides additional authoritative guidance in determining
whether a market is active or inactive, and whether a transaction is
distressed, is applicable to all assets and liabilities (i.e. financial and
non-financial) and will require enhanced disclosures. The adoption of FAS FSP 157-4 had no impact
on the Companys financial position or results of operations.

Effective April 1,
2009, the Company adopted FASB Staff Position FAS 115-2, FAS 124-2,
and EITF 99-20-2, Recognition and
Presentation of Other-Than-Temporary Impairments, which provide
additional guidance to provide greater clarity about the credit and noncredit
component of an other-than-temporary impairment event and to more effectively
communicate when an other-than-temporary impairment event has occurred. This
FSP applies to debt securities. The
adoption of FSP FAS 115-2 had no impact on the Companys financial position or
results of operations. The Company will
continue to evaluate the impact on financial statements at each interim
reporting period.

On June 3, 2009, the
FASB approved the FASB Accounting Standards
Codification, or the Codification, as the single source of
authoritative nongovernmental Generally Accepted Accounting Principles, or
GAAP, in the United States. The Codification will be effective for interim and
annual periods ending after September 15, 2009. Upon the effective date,
the Codification will be the single source of

authoritative accounting
principles to be applied by all nongovernmental U.S. entities. All other
accounting literature not included in the Codification will be
nonauthoritative. The Company does not expect the adoption of the Codification
to have an impact on its financial position or results of operations.

In June 2009, the
FASB issued SFAS No. 166, Accounting
for Transfers of Financial Assets, an amendment of FASB Statement No. 140,
or SFAS 166 which is effective for periods ending after September 15,
2009.

SFAS 166
prescribes the information that a reporting entity must provide in its
financial reports about a transfer of financial assets; the effects of a
transfer on its financial position, financial performance, and cash flows; and
a transferors continuing involvement in transferred financial assets.
Specifically, among other aspects, SFAS 166 amends Statement of Financial
Standard No. 140, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
or SFAS 140, by removing the concept of a qualifying special-purpose
entity from SFAS 140 and removes the exception from applying FIN 46(R) to
variable interest entities that are qualifying special-purpose entities. It
also modifies the financial-components approach used in SFAS 140.
SFAS 166 is effective for transfer of financial assets occurring on or
after January 1, 2010. The Company has not determined the effect that the
adoption of SFAS 166 will have on its financial position or results of
operations but the effect will generally be limited to future transactions.
Historically, the Company has not had any material transfer of financial
assets.

3. FAIR VALUE
MEASUREMENTS

The adoption of
SFAS 157 with respect to financial assets and liabilities and
non-financial assets and liabilities that are remeasured and reported at fair
value at least annually did not have an impact on the financial results of the
Company. The Company will continue to evaluate the impact, if any, that the
implementation of this standard will have on its financial statements as it
relates to its non-financial assets and liabilities.

The following tables
present information about the Companys financial assets that have been
measured at fair value as of June 30, 2009 and December 31, 2008 and
indicate the fair value hierarchy of the valuation inputs utilized to determine
such fair value. In general, fair values determined by Level 1 inputs utilize
quoted prices (unadjusted) in active markets for identical assets or
liabilities. Fair values determined by Level 2 inputs utilize observable
inputs other than Level 1 prices, such as quoted prices, for similar
assets or liabilities, quoted prices in markets that are not active or other
inputs that are observable or can be corroborated by observable market data for
substantially the full term of the related assets or liabilities. Fair values
determined by Level 3 inputs are unobservable data points for the asset or
liability, and includes situations where there is little, if any, market
activity for the asset or liability.

As
of June 30, 2009 and December 31, 2008, the Companys short-term
investments consisted of U.S. Treasury notes and bills which are categorized as
Level 1 in accordance with SFAS 157. The fair values of our cash
equivalents and marketable debt securities are determined through market,
observable and corroborated sources. The carrying amounts reflected in the
consolidated balance sheets for cash, cash equivalents, accounts receivable,
other current assets, accounts payable and accrued expenses and other current
liabilities approximate fair value due to their short-term maturities.

4. STRATEGIC
COLLABORATIONS

sanofi-aventis

In February 2008,
the Company entered into an exclusive worldwide license with sanofi-aventis for
the development and commercialization of the fully human monoclonal antibody
DX-2240 as a therapeutic product, as well as a non-exclusive license to the
Companys proprietary antibody phage display technology. Under these licenses,
the Company is eligible to receive royalties based on commercial sales of
DX-2240 and other antibodies developed by sanofi-aventis. As an exclusive
licensee, sanofi-aventis will be responsible for the ongoing development,
commercialization and consolidation of sales of DX-2240. For certain other
future antibody product candidates discovered by sanofi-aventis, the Company
will retain co-development and profit sharing rights, while sanofi-aventis will
maintain ultimate responsibility for development and commercialization, and
will book sales worldwide.

As a result of
these agreements, the Company received approximately $24.7 million of
cash, net of taxes, in 2008 encompassing the upfront DX-2240 license fee, a
license fee for Dyaxs proprietary antibody phage display technology, a
transfer fee for DX-2240 inventory and know-how, and the transfer of additional
specified deliverables. In 2009, the
Company received $190,000 for annual maintenance on the license of the Companys
proprietary antibody phage display technology.
The Company applied the provisions of EITF 00-21 and determined
that these performance obligations represented a single unit of accounting. As
the Company has established fair value in relation to the antibody phage
display technology license, it is recognizing the revenue over the performance
period. During the three and six months ended June 30, 2009, the Company
recognized revenue of $102,000 and $205,000, respectively, and during the three
and six months ended June 30, 2008, the Company recognized revenue of
$104,000 and $323,000, respectively, related to the antibody phage display
technology license.

Cubist
Pharmaceuticals, Inc.

In April 2008, Dyax
entered into an exclusive license and collaboration agreement with Cubist
Pharmaceuticals, Inc. (Cubist), for the development and commercialization
in North America and Europe of the intravenous formulation of DX-88 for the
reduction of blood loss during surgery. Under this agreement, Cubist has
assumed responsibility for all further development and costs associated with
DX-88 in the licensed indications in the Cubist territory. The Company will be
eligible to receive additional clinical, regulatory and sales-based milestone
payments. The Company is also entitled to receive tiered, double-digit
royalties based on sales of DX-88 by Cubist. The agreement also provides an
option for the Company to retain certain US co-promotion rights. The Company
applied the provisions of EITF 00-21 to determine whether the performance
obligations under this agreement, including development, participation in
steering committees, and manufacturing services should be accounted for as a
single unit or multiple units of accounting.
Revenue is being recognized under a Contingency Adjusted Performance
Model (CAPM).

As
a result of this agreement, the Company received a $17.5 million in
license and milestone fees in 2008. Additionally, the Company received
$3.6 million for drug product supply and reimbursement of costs incurred
in 2008 related to the conduct of the Phase 2 clinical trial, known as
Kalahari 1. These amounts, and any future reimbursements and milestones, are
being recorded as revenue over the remaining development period of DX-88 in the
Cubist territory, which is currently estimated at five years. The Company will
periodically reassess the length of the estimated development period based upon
the

completed
effort. During the six months ended June 30,
2009, the Company invoiced Cubist approximately $93,000, primarily for DX-88
drug substance and product. As of June 30, 2009, the Company has $15.9
million of revenue deferred related to this agreement, which is recorded in
deferred revenue on the accompanying consolidated balance sheets. During the three and six months ended June 30,
2009, the Company recognized revenue of $1.1 million and $2.1 million,
respectively, and during the three and six months ended June 30, 2008, the
Company recognized revenue of $835,000 related to this agreement.

5.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts
payable and accrued expenses consist of the following (in thousands):

June 30,
2009

December 31,
2008

Accounts
payable

$

2,917

$

1,325

Accrued
employee compensation and related taxes

2,506

4,914

Accrued
external research and development and contract manufacturing

3,547

3,529

Other
accrued liabilities

1,954

2,301

$

10,924

$

12,069

6. NOTE PAYABLE

In August 2008, the
Company entered into an agreement with Cowen Healthcare Royalty Partners, LP
(Cowen Healthcare) for a $50.0 million loan secured by the Companys phage
display Licensing and Funded Research Program (LFRP). This loan is now known as
the Tranche A loan. In March 2009,
the Company amended and restated the loan agreement with Cowen Healthcare to
include a Tranche B loan of $15.0 million. The Company used $35.1 million
from the proceeds of the Tranche A loan to pay off its remaining obligation
under a then existing agreement with Paul Royalty Fund Holdings II, LP
(Paul Royalty) (see note 7).

The Tranche A and Tranche
B loans (collectively, the Loan) mature in August 2016. The Tranche A portion bears interest at an
annual rate of 16%, payable quarterly, and the Tranche B portion bears interest
at an annual rate of 21.5%, payable quarterly. The Loan may be prepaid without
penalty, in whole or in part, beginning in August 2012. In connection with the Loan, the Company has
entered into a security agreement granting Cowen Healthcare a security interest
in the intellectual property related to the LFRP, and the revenues generated by
Dyax through the license of the intellectual property related to the LFRP. The
security agreement does not apply to the Companys internal drug development or
to any of the Companys co-development programs.

Under the terms of the
loan agreement, the Company is required to repay the Loan based on the annual
net LFRP receipts. Until June 30,
2013, required payments are tiered as follows: 75% of the first
$10 million in specified annual LFRP receipts, 50% of the next
$5 million and 25% of annual included LFRP receipts over
$15 million. After June 30,
2013, and until the maturity date or the complete amortization of the Loan,
Cowen Healthcare will receive 90% of all included LFRP receipts. If the Cowen Healthcare portion of LFRP
receipts for any quarter exceeds the interest for that quarter, then the
principal balance will be reduced. Any
unpaid principal will be due upon the maturity of the Loan. If the Cowen Healthcare portion of LFRP
revenues for any quarterly period is insufficient to cover the cash interest
due for that period, the deficiency may be added to the outstanding principal
or paid in cash by the Company. After five years, the Company must repay to
Cowen Healthcare all additional accumulated principal above the original
$50.0 million and $15.0 million loan amounts of Tranche A and Tranche B,
respectively.

In connection with the
Tranche A loan, the Company issued to Cowen Healthcare a warrant to purchase
250,000 shares of the Companys common stock at a 50% premium over the 30-day
average closing price. The warrant has
an eight-year term and is exercisable beginning on August 5, 2009. The

Company has estimated the
relative fair value of the warrant to be $853,000, using the Black-Scholes
valuation model, assuming a volatility factor of 83.64%, risk-free interest
rate of 4.07%, an eight-year expected term and an expected dividend yield of
zero. In conjunction with the Tranche B
loan, the Company issued to Cowen Healthcare a warrant to purchase 250,000
shares of the Companys common stock at a 25% premium over the 45-day average
closing price. The warrant expires in August 2016
and is exercisable beginning on March 27, 2010. The Company has estimated the relative fair
value of the warrant to be $477,000, using the Black-Scholes valuation model,
assuming a volatility factor of 85.98%, risk-free interest rate of 2.77%, a
seven-year, four-month expected term and an expected dividend yield of
zero. The relative fair values of the
warrants are recorded in additional paid-in capital on the Companys
consolidated balance sheets.

The cash proceeds from
the Loan were recorded as a note payable on the Companys consolidated balance
sheet. The note payable balance was
reduced by $1.3 million for the fair value of the Tranche A and Tranche B
warrants, and by $580,000 for payment of Cowen Healthcares legal fees in
conjunction with the Loan. Each of these
amounts is being accreted over the life of the note. During the three and six months ended June 30,
2009, the Company recorded $61,000 and $103,000, respectively, of accretion
associated with the debt discount and the warrants, $2.6 million and $4.5
million, respectively, in interest expense, and made payments to Cowen totaling
$1.3 million and $6.6 million, respectively.
During the six months ended June 30, 2009, $2.1 million was
allocated to the reduction of the principal balance. As of June 30, 2009, there was $1.3
million of accrued interest payable in relation to this loan which is recorded
on the Companys consolidated balance sheet. The Loan principal balance at June 30,
2009, and December 31, 2008 was $59.7 million and $48.1 million,
respectively. The amount recorded on the
Companys consolidated balance sheets at June 30, 2009 and December 31,
2008, which is net of accrued interest payable and the unamortized portions of
the discount and warrants, is $58.0 million and $46.9 million,
respectively. The estimated fair value
of the note payable was $51.3 million at June 30, 2009.

7. LONG-TERM OBLIGATIONS

In
August 2006, the Company entered into a Royalty Interest Assignment
Agreement with Paul Royalty under which it received an upfront payment of $30
million. In exchange for this payment, the Company assigned Paul Royalty
a portion of milestones, royalties and other license fees to be received by it
under the LFRP through 2017. This agreement was extinguished in August 2008
using proceeds from the Cowen Healthcare note payable, at which time all Paul
Royalty rights to LFRP receipts were terminated (see note 6).

Under the terms of the
agreement, Paul Royalty was assigned a portion of the annual net LFRP
receipts. The portion assigned to Paul Royalty was tiered as
follows: 70% of the first $15 million in annual receipts, 20% of the next
$5 million, and 1% of any receipts above $20 million. The agreement also
provided for annual guaranteed minimum payments to Paul Royalty, which start at
$1.75 million through 2007 and increased to $3.5 million in 2008. Paul
Royaltys rights to receive a portion of LFRP receipts were to have continued
for up to 12 years, depending upon the performance of the LFRP.

The upfront cash payment
of $30.0 million, less the $500,000 in cost reimbursements paid to Paul Royalty
was recorded as a debt instrument in long-term obligations on the Companys
consolidated balance sheet. Based upon estimated future payments expected
under this agreement, the Company determined the interest expense by using the
effective interest method. The best estimate of future payments was based
upon returning to Paul Royalty an internal rate of return of 25% through net
LFRP receipts. Due to the application of the effective interest method
and the total expected payments, the Company recorded interest expense of $3.5
million for the six months ended June 30, 2008. During the six
months ended June 30, 2008, the Company made payments totaling $4.2
million related to this obligation to Paul Royalty.

On August 5, 2008,
the Company paid off this loan with a $35.1 million cash payment, of which
$27.0 million was allocated to the principal amount and $8.1 million was
recorded as loss on extinguishment of debt. As of both June 30, 2009
and December 31, 2008, there was no outstanding debt balance under this
agreement.

The Company capitalized
$257,000 of debt issuance costs related to this agreement which, prior to August 5,
2008, were being amortized over the term of the related debt using the
effective interest method. In August 2008, the unamortized debt
issuance costs were fully amortized.

8.
STOCKHOLDERS EQUITY AND STOCK-BASED
COMPENSATION

Common Stock

In
June 2009, the Company issued an aggregate of 8,539,605 shares of its
common stock in an underwritten public offering at a price of $2.02 per
share. The aggregate net proceeds to the Company were approximately
$16.1 million after deducting underwriting fees and offering expenses.

In
2008, the Company entered into a Common Stock Purchase Agreement with Azimuth
Opportunity, Ltd. (Azimuth) which allows the Company to issue and sell up to an
aggregate amount of $50 million in common stock with a minimum price of $2.00
per share, less the agreed upon discount which ranges from 4.05% to 6.25% based
on the Companys stock price. In April 2009,
pursuant to a single draw down notice, the Company issued 740,965 shares of its
common stock to Azimuth and received net proceeds of approximately $1.6
million. As of June 30, 2009, Azimuth
was committed to purchase up to $48.4 million of the Companys common stock
under the Purchase Agreement, if, at the Companys sole discretion, it presents
draw down notices.

Equity
Incentive Plan

The Companys 1995 Equity
Incentive Plan (the Equity Plan), as amended to date, is an equity plan under
which equity awards, including awards of restricted stock and incentive and
nonqualified stock options to purchase shares of common stock may be granted to
employees, consultants and directors of the Company by action of the
Compensation Committee of the Board of Directors. Options are generally granted
at the current fair market value on the date of grant, generally vest ratably
over a 48-month period, and expire within ten years from date of grant. The
Equity Plan is intended to attract and retain employees and to provide an
incentive for them to assist the Company to achieve long-range performance
goals and to enable them to participate in the long-term growth of the Company.

At the May 14, 2009
Annual Meeting of Stockholders, the Equity Plan was amended to increase the
number of shares of common stock available for issuance under the Equity Plan
by 4,500,000 shares to 18,350,000 shares.
At June 30, 2009, a total of 5,647,465 shares were reserved and
available for issuance under the Equity Plan.
The compensation expense in connection with the Equity Plan for the
three and six months ended June 30, 2009 was approximately $956,000 and
$3.2 million, respectively, exclusive of stock compensation expense associated
with the March 2009 restructuring.

Employee
Stock Purchase Plan

The Companys 1998
Employee Stock Purchase Plan (the Purchase Plan), as amended in May 2002,
allows employees to purchase shares of the Companys common stock at a discount
from fair market value. Under the
Purchase Plan, eligible employees may purchase shares during six-month offering
periods commencing on January 1 and July 1 of each year at a price per
share of 85% of the lower of the fair market value price per share on the first
or last day of each six-month offering period.
Participating employees may elect to have up to 10% of their base pay
withheld and applied toward the purchase of such shares, subject to the
limitation of 875 shares per participant per quarter. The rights of participating employees under
the Purchase Plan terminate upon voluntary withdrawal from the Purchase Plan at
any time or upon termination of employment.
The compensation expense in connection with the Purchase Plan for the
three and six months ended June 30, 2009 was approximately $21,000 and
$72,000, respectively. There were 49,960
and 49,971 shares purchased under the Purchase Plan during the six months ended
June 30, 2009 and 2008, respectively.

At the May 14, 2009
Annual Meeting of Stockholders, the Purchase Plan was amended to increase the
maximum number of shares reserved for issuance under the Purchase Plan by
630,000 shares to 1,330,000 shares. At June 30,
2009, a total of 743,991 shares were reserved and available for issuance under
the Purchase Plan.

Stock-Based Compensation Expense

The following table
reflects stock compensation expense recorded during the three and six months
ended June 30, 2009 and 2008 in accordance with SFAS 123R (in
thousands):

Three Months Ended
June 30,

Six Months EndedJune 30,

2009

2008

2009

2008

Compensation
expense related to:

Equity
incentive plan

$

956

$

1,185

$

3,478

$

2,112

Employee
stock purchase plan

21

20

72

44

$

977

$

1,205

$

3,550

$

2,156

Stock-based
compensation expense charged to:

Research
and development expenses

$

471

$

732

$

1,116

$

1,279

General
and administrative expenses

$

506

$

473

$

2,197

$

877

Restructuring
charges





$

237



During the three months
ended March 31, 2009, amendments to the exercise and vesting schedules to
certain options resulted in additional stock-based compensation expense of $1.3
million, inclusive of $237,000 stock-based compensation expense recorded in
relation to the restructuring activities.

9. RESTRUCTURING CHARGES

In March 2009,
the Company eliminated positions from various departments to focus its
resources on the commercialization of its lead product candidate, DX-88. As a result of the restructuring, during the three
months ended March 31, 2009, the Company recorded one-time charges of
approximately $1.9 million, which includes severance related charges of
approximately $1.6 million, outplacement costs of approximately $107,000, stock
compensation expense of $237,000 for amendments to the exercise and vesting
schedules to certain options and other exit costs of $26,000. Substantially all amounts were paid during
the quarter ended June 30, 2009.

During the three months ended June 30, 2008, a charge
of approximately $3.8 million was recorded in connection with the closure of
the Companys Liege-based research facility. This amount included
severance related charges of approximately $2.8 million, contract termination
costs of approximately $670,000 and other exit costs of $257,000. Of
these restructuring charges, $112,000 were paid during the three months ended June 30,
2008, with the remainder paid in the second half of 2008.

During the three months ended June 30, 2008, a charge
of approximately $352,000 was recorded for the impairment of fixed assets in
connection with the closure of the Companys Liege-based research facility.

The Company has recorded
a deferred tax asset of approximately $1.9 million at December 31,
2008 reflecting the benefit of deductions from the exercise of stock options
which has been fully reserved until it is more likely than not that the benefit
will be realized. The benefit from this
$1.9 million deferred tax asset will be recorded as a credit to additional
paid-in capital if and when realized through a reduction of cash taxes.

As required by SFAS No. 109,
the Companys management has evaluated the positive and negative evidence
bearing upon the realizability of its deferred tax assets, and has determined
that it is more likely than not that the Company will recognize the benefits of
the deferred tax assets. Accordingly, a
valuation allowance of approximately $142.6 million was established at December 31,
2008.

The tax years 1994
through 2007 remain open to examination by major taxing jurisdictions to which
the Company is subject, which are primarily in the United States, as
carryforward attributes generated in years past may still be adjusted upon
examination by the Internal Revenue Service or state tax authorities if they
have or will be used in a future period.
The Company is currently not under examination in any jurisdictions for
any tax years.

The discussion in this item and elsewhere in this report
contains forward-looking statements involving risks and uncertainties that
could cause actual results to differ materially from those expressed in the
forward-looking statements. These risks and uncertainties include those
described in Part II, Item 1a  Risk Factors.

Overview

We are a clinical stage
biopharmaceutical company focused on the discovery, development and
commercialization of novel biotherapeutics for unmet medical needs, with an
emphasis on inflammatory and oncology indications. We use our proprietary drug
discovery technology, known as phage display, to identify antibody, small
protein and peptide compounds for clinical development. This phage display
technology fuels our internal pipeline of promising drug candidates, attracts
numerous licensees and collaborators, and has the potential to generate
important revenues in the future.

Our lead product
candidate, DX-88, is a small recombinant protein that is a highly specific
inhibitor of human plasma kallikrein. We and our collaborators are currently
developing DX-88 in multiple indications.

The most advanced
indication for DX-88 is in the treatment of hereditary angioedema (HAE), a
potentially life-threatening inflammatory condition. DX-88 has orphan drug
designation in the United States and European Union (EU), as well as Fast Track
designation in the United States for the treatment of acute attacks of HAE. In
this indication, we have completed three Phase 2 trials and two
Phase 3 trials of DX-88 for subcutaneous administration. On September 23,
2008, we submitted a Biologics License Application (BLA) with the United States
Food and Drug Administration (FDA) for the use of DX-88 for the treatment of
acute attacks of HAE, and the FDA designated this application for priority
review. On February 4, 2009, the FDAs Pulmonary-Allergy Advisory
Committee voted in favor of approval of our BLA. On March 26, 2009, we
received a complete response letter from the FDA outlining the requirements for
approval of DX-88 for HAE. Specifically,
the FDA requested submission of a Risk Evaluation and Mitigation Strategy
(REMS) and additional information with respect to the chemistry, manufacturing
and controls (CMC) section of the BLA. The letter also included a requirement
that we conduct certain post-marketing studies, but did not include
requirements for any additional clinical trials for approval of DX-88. We believe all issues raised in the complete
response letter were fully addressed in our reply, which was submitted on June 1,
2009 and accepted for review by the FDA.
In connection with the acceptance, the FDA assigned our BLA a new
Prescription Drug User Fee Act (PDUFA) action date of December 1, 2009.

If the BLA is approved,
we intend to market and sell DX-88 on our own in North America. We are
currently negotiating with potential partners to commercialize DX-88 for HAE
and other angioedema indications in markets outside of North America.

Outside of HAE, DX-88 is
also being developed in additional indications. These include use of DX-88 for
the reduction of blood loss during surgery in collaboration with Cubist
Pharmaceuticals (Cubist), and for the treatment of retinal diseases in
collaboration with Fovea Pharmaceuticals (Fovea). In addition, we are also exploring use of
DX-88 for the treatment of ACE inhibitor-induced angioedema, a life threatening
inflammatory response brought on by adverse reactions to ACE inhibitors; and
acquired angioedema, a condition associated with B-cell lymphoma and autoimmune
disorders.

In addition to DX-88, we
continue to use our proprietary phage display to identify new drug candidates
such as DX-2240 and DX-2400, two fully human monoclonal antibodies with
therapeutic potential in oncology indications. In February 2008, we
entered into an exclusive license agreement with sanofi-aventis under which
they will be responsible for the continued development of DX-2240. DX-2400 is
currently in preclinical development within our development pipeline.

Although
we use our phage display technology primarily to advance our own internal
development activities, we also leverage it through licenses and collaborations
designed to generate revenues and provide us access to co-develop and/or
co-promote drug candidates identified by other biopharmaceutical and
pharmaceutical companies. Through our Licensing and Funded Research Program
(LFRP), we have more than 70 licenses and collaborations, which have thus far
resulted in 14 product candidates that licensed third parties have advanced
into clinical trials and one product that has received market approval from the
FDA. A portion of the current and future revenues generated through the LFRP
are pledged to secure payment of loans we received from Cowen Healthcare in August 2008
and March 2009, which loans had an aggregate outstanding balance of $59.7
million as of June 30, 2009.

We
have incurred net losses since our inception, including net losses of $14.4
million and $39.3 million for the three and six months ended June 30,
2009, respectively. We expect to
continue to incur significant additional net losses over at least the next several
years. We do not expect to generate profits until the therapeutic products from
our development portfolio reach the market after being subjected to the
uncertainties of the regulatory approval process. Our revenues and operating results have
fluctuated on a quarter to quarter basis and we expect these fluctuations to
continue in the future.

Our
Business Strategy

Our strategic goal is to
develop new biotherapeutics for unmet medical needs, with an emphasis on
inflammatory and oncology indications. We intend to accomplish this goal
through the following activities:

·DX-88 Franchise. We will continue to focus our
internal efforts on obtaining market approval for DX-88 for the treatment of
acute attacks of HAE and other angioedemas. We intend to commercialize DX-88
for HAE on our own in North America and to establish partnerships in other
major markets. We plan to expand the label beyond HAE, in two additional
angioedemas (acquired and ACE inhibitor-induced). In addition to our internal
efforts, ongoing development of DX-88 for the reduction of blood loss during
on-pump cardiothoracic surgery and other surgical indications is being pursued
through our collaboration agreement with Cubist. Fovea will be developing an
ophthalmic formulation for DX-88 starting with retinal vein occlusion-induced
macular edema. We will continue to explore the therapeutic potential of DX-88
in other indications.

·Emerging Pipeline and Phage Display
Technology. We
will continue to use our proprietary phage display technology to identify new
drug candidates and advance others within our preclinical pipeline. These
preclinical drug candidates may be developed independently or through strategic
partnerships with other biotechnology and pharmaceutical companies.

Although we will
continue to seek to retain ownership and control of our internally discovered
drug candidates by taking them further into preclinical and clinical
development, we will also partner certain candidates, as we have with our
DX-2240 antibody, in order to balance the risks associated with drug discovery
and maximize return for our stockholders.

·Licensing and Funded Research
Program. We
will also continue to leverage our phage display technology through our LFRP in
order to generate ongoing future revenues and to gain rights to co-develop
and/or co-promote drug candidates identified by certain of our collaborators. There
are currently 14 product candidates that licensed third parties in the LFRP
have advanced into clinical trials and one product that has received market
approval from the FDA.

DX-88 Development Programs

DX-88 for HAE. We are developing DX-88 as a treatment of acute
attacks of HAE. We have completed three
Phase 2 trials and two Phase 3 trials of DX-88 for subcutaneous
administration. An ongoing, open-label
continuation study is also being conducted to augment our clinical data with
respect to DX-88.

Our study results in patients
exposed to DX-88 suggest that it can provide repeated therapeutic benefit to
HAE patients for all types of HAE attacks, including potentially fatal
laryngeal attacks. Furthermore, with repeated dosing there is no apparent decrease
in DX-88s therapeutic effects on HAE attacks in these patients. To date, DX-88
is generally well tolerated, with the most serious risks being hypersensitivity
reactions, including anaphylaxis, which are resolved with treatment. Other
adverse events include headache, nausea and fatigue.

Based on the positive
efficacy and satisfactory safety profile results from our EDEMA4 and EDEMA3
trials, we submitted our BLA to the FDA on September 23, 2008. The FDA
accepted our BLA for filing and designated the application for priority review.
The FDAs Pulmonary-Allergy Drugs Advisory Committee reviewed our submission
for the subcutaneous formulation of DX-88 for HAE on February 4, 2009, and
the Committee voted in favor of approval of DX-88 for HAE by a margin of six
votes in favor to five votes against, with two voters abstaining. In addition
to the overall vote in favor of approval, the Committee provided
recommendations aimed at a better understanding of DX-88s safety
characteristics in the subset of patients that experience hypersensitivity
reactions. Earlier in 2009, a
pre-approval inspection of the manufacturing site, processes and supporting
quality systems was successfully completed at our third-party contract manufacturer,
Avecia Biologics, Ltd. On March 26,
2009, we received a complete response letter from the FDA outlining the
requirements for approval of DX-88 for HAE.
Specifically, the FDA requested submission of a REMS, and additional
information with respect to the CMC section of the BLA. The letter also
included a requirement that we conduct certain post-marketing studies, but did
not include requirements for any additional clinical trials for approval of
DX-88. We believe all issues raised in the
complete response letter were fully addressed in our reply, which was submitted
on June 1, 2009 and accepted for review by the FDA. In connection with the acceptance, the FDA
assigned our BLA a new PDUFA action date of December 1, 2009.

Given our familiarity
with the HAE market and its relatively small number of treating
allergists, we intend to independently commercialize DX-88 in North America.
For markets outside of North America, we will seek to establish arrangements
where DX-88 is sold by pharmaceutical companies that are already well established
in these regions.

During the three months
ended June 30, 2009 (the 2009 Quarter), research and development expenses
on the HAE program totaled $8.4 million compared with $9.7 million in the three
months ended June 30, 2008 (the 2008 Quarter). The decrease in spending from 2008 to 2009 is
attributable primarily to cost savings of approximately $2.2 million as a
result of the workforce reduction in March 2009 and a decrease of $1.5
million in clinical trial costs. These
decreases were offset by an increase in costs of $2.4

million
associated with
the manufacture of DX-88 drug material. During the six months ended June 30,
2009 (the 2009 Period), research and development expenses on the HAE program
totaled $21.1 million compared with $16.8 million in the six months ended June 30,
2008 (the 2008 Period). The increase in
spending from 2008 to 2009 is attributable primarily to an increase in costs of
$8.0 million associated
with the manufacture of DX-88 drug material, as well as an increase
in infrastructure to support plans for commercialization of DX-88 for HAE. These increases
were offset by cost savings of approximately $2.3 million as a result of the
workforce reduction in March 2009 and a decrease of $2.0 million in
clinical trial costs.

DX-88 for the Treatment of Other Angioedemas.Another form of angioedema is induced by the use of
so-called ACE inhibitors. With an estimated 30 to 40 million prescriptions
written annually worldwide, ACE inhibitors are widely prescribed to reduce
Angiotensin Converting Enzyme (ACE) and generally reduce high blood pressure
and vascular constriction. Approximately 17% of all angioedemas admitted to
medical centers for treatment are identified as ACE inhibitor-induced
angioedema. Research suggests the use of ACE inhibitors increases the relative
activity of bradykinin, a protein that causes blood vessels to enlarge, or dilate,
which can also cause the swelling known as angioedema. As a specific inhibitor
of plasma kallikrein, an enzyme needed to produce bradykinin, DX-88 has the
potential to be effective for treating this condition. We are working with
investigators affiliated with the University of Cincinnati as they prepare to
initiate an investigator sponsored study for drug-induced angioedema.

Acquired angioedema is a
condition associated with B-cell lymphoma and autoimmune disorders. Dr. Marco
Cicardi, of the University of Milan, plans to sponsor a compassionate use
program for DX-88 in acquired angioedema.

Both of these studies are
expected to be initiated by the end of 2009.

DX-88 for On-Pump CTS. Industry
publications report that there are an estimated one million procedures
performed worldwide each year involving on-pump cardiothoracic surgery, or CTS.
On-pump CTS procedures, which are performed for patients who have narrowings or
blockages of the coronary arteries, often involve use of a heart-lung machine
commonly referred to as the pump. In these procedures, the heart is stopped
with medications, and the pump does the work of the heart and lungs during
surgery. This allows the surgeon to position the heart as needed, to accurately
identify the arteries and to perform the bypass while the heart is stationary.

The use of the pump
during CTS procedures elicits an adverse systemic inflammatory response. Many
patients undergoing on-pump CTS procedures experience significant
intraoperative blood loss that requires transfusion. Plasma kallikrein has been
implicated in the bodys response to on-pump heart surgery as a major
contributor to the significant blood loss seen in on-pump CTS patients and to
the pathologic inflammation that plays a role in the complications of on-pump
CTS procedures.

In April, 2008, Dyax
entered into an exclusive license and collaboration agreement with Cubist for
the development and commercialization in North America and Europe of the
intravenous formulation of DX-88 for the reduction of blood loss during
surgery. Under this agreement, Cubist assumed responsibility for all further
development and costs associated with DX-88 in the licensed indications in the
Cubist territory.

Cubist has initiated two
Phase 2 trials. The first, known as
CONSERVTM 1,
is a dose ranging study evaluating 5, 25 and 75 milligram doses of DX-88 versus
placebo in patients undergoing primary coronary artery bypass graft (CABG)
surgery who are at a low risk of bleeding complications. The second trial, known as CONSERVTM 2, compares a
single 75 milligram dose of DX-88 to tranexamic acid in patients at a higher
risk of bleeding. Combined, these trials are expected to enroll
approximately 650 patients. Cubist has reported that CONSERVTM 1 is expected
to be fully enrolled by the end of 2009 and currently anticipates an end of
Phase 2 meeting with the FDA in mid-2010.

During the three and six
months ended June 30, 2008, research and development expenses for the CTS
program totaled $417,000 and $1.6 million, respectively. There have been no
costs incurred by us in 2009 and we do not expect to incur future expenditures
for this program.

DX-88
for Ophthalmic Indications. We have entered into a license agreement
with Fovea Pharmaceuticals (Fovea) for the ocular formulation of DX-88 for the
treatment of retinal diseases in the EU. Under this agreement, Fovea will fully
fund development for the first indication, retinal vein occlusion-induced
macular edema, for which an investigational new drug (IND) application is
expected in 2009. Dyax retains all rights to commercialize DX-88 in this
indication outside of the EU.

Goals for DX-88 Development Programs. Our goal for the ongoing development of DX-88 is to
ensure that we and our various collaborators move rapidly to develop DX-88 in
multiple indications and obtain marketing approval from the FDA and
international regulatory agencies in such indications. Cash inflows from these
programs, other than upfront and milestone payments from our collaborations
will not commence until after marketing approvals are obtained, and then only
if the product candidate finds acceptance in the marketplace as a treatment for
its disease indication. Because of the many risks and uncertainties related to
the completion of clinical trials, receipt of marketing approvals and
acceptance in the marketplace, we cannot predict when cash inflows from these
programs will commence, if ever.

Other
Discovery and Development Programs.

In addition to our drug
candidates in clinical trials, our phage display technology and expertise has
allowed us to develop a pipeline of drug candidates. Of our existing pipeline
candidates, the most advanced are DX-2240 and DX-2400, two fully human
monoclonal antibodies with therapeutic potential in oncology indications.

Our DX-2240 antibody has
a novel mechanism of action that targets the Tie-1 receptor on tumor blood
vessels. In preclinical animal models, DX-2240 has demonstrated activity
against a broad range of solid tumor types. Data also indicates increased
activity when combined with antiangiogenic therapies such as Avastin® and
Nexavar®. In February 2008, we entered into agreements with
sanofi-aventis, under which we granted sanofi-aventis exclusive worldwide
rights to develop and commercialize DX-2240 as a therapeutic product, as well
as a non-exclusive license to our proprietary antibody phage display
technology.

Our DX-2400 antibody is a
specific inhibitor of Matrix Metalloproteinase-14 (MMP-14), a protease
expressed on tumor cells and tumor blood vessels. To date, small molecule
approaches have failed to produce compounds that distinguish between closely
related MMPs. In contrast, our technology has allowed us to identify a highly
selective inhibitor of MMP-14 that does not inhibit other proteases that we
have tested. In animal models, DX-2400 has been shown to significantly inhibit
tumor progression and metastasis in a dose-dependent manner in breast, prostate
and melanoma tumors. Herceptin®, a leading breast cancer treatment, is
effective in only the subtype of breast tumors which are Her2+. Current data
suggests that DX-2400 may be effective against both Her2+ and Her2- breast
tumors, potentially offering promise for treatment of a wider range of breast
cancer patients. DX-2400 is currently in preclinical development within our
development pipeline.

Given the uncertainties
of the research and development process, it is not possible to predict with
confidence if we will be able to enter into additional partnerships or
otherwise internally develop any of these other preclinical drug candidates
into marketable pharmaceutical products. We monitor the results of our
discovery research and our nonclinical and clinical trials and frequently
evaluate our preclinical pipeline in light of new data and scientific, business
and commercial insights with the objective of balancing risk and potential.
This process can result in relatively abrupt changes in focus and priority as
new information becomes available and we gain additional insights into ongoing
programs and potential new programs.

Revenue. Substantially all our revenue has come from licensing,
funded research and development fees, including milestone payments from our
licensees and collaborators. This revenue fluctuates from quarter-to-quarter
due to the timing of the clinical activities of our collaborators and
licensees. Revenue increased to $4.8
million in the 2009 Quarter from $3.8 million in the 2008 Quarter. This includes
revenue from our April 2008 agreement with Cubist, which was $1.1 million
and $835,000 during the 2009 Quarter and 2008 Quarter, respectively. In addition, revenue increased by
approximately $583,000 during the 2009 Quarter, related to $1.5 million received
in July 2009 for a clinical milestone, which was achieved during the 2009
Quarter related to one of our ongoing library license agreements. The milestone revenue recognized was in
addition to revenue of $4.2 million previously reported by us in the release of
financial results reported on July 22, 2009.

Research and Development.
Our research and development expenses for the 2009 and 2008 Quarters
were $11.4 million and $18.0 million, respectively. Our research and development expenses arise
primarily from compensation and other related costs for our personnel dedicated
to research and development activities, fees paid and costs reimbursed to
outside parties to conduct research and clinical trials and the cost of
manufacturing drug material prior to FDA approval. The 2009 decrease in
research and development expenses was primarily related to cost savings
of approximately $4.7 million as a result of the workforce reduction in March 2009
and $1.0 million from cost savings related to the closure
of our research facility in Liege, Belgium at the end of
the 2008 Quarter. In addition, clinical
trial costs decreased by approximately $3.1 million during the 2009 Quarter, as
we completed our EDEMA4 trial in 2008.
These decreases were offset by an increase in costs of $2.4 million associated
with the manufacture of drug substance.

General and
Administrative. Our
general and administrative expenses consist primarily of the costs of our
management and administrative staff, as well as expenses related to business
development, protecting our intellectual property, administrative occupancy,
professional fees, market research, promotion activities and the reporting
requirements of a public company. General and administrative expenses were $5.2
million for both the 2009 Quarter and the 2008 Quarter. Internal costs increased during the 2009
Quarter due to the increase in infrastructure to support plans for
commercialization of DX-88 for HAE. This
increase was offset by a decrease in costs including professional fees and the
workforce reduction in March 2009.

Restructuring and Impairment. During the three months ended June 30,
2008, we incurred restructuring fees of $3.8 million, and recorded an
impairment charge related to fixed assets of $352,000. These were solely
due to the closing of our Liege based research facility.

Six Months Ended June 30, 2009 and 2008

Revenue. Substantially all our revenue has come from licensing,
funded research and development fees, including milestone payments from our
licensees and collaborators. This revenue fluctuates from period-to-period due
to the timing of the clinical activities of our collaborators and
licensees. Revenue increased to $10.8
million in the 2009 Period from $6.5 million in the 2008 Period, an increase of
$4.3 million. This increase primarily relates to library license activity
and funded research, including additional revenue of $1.3 million recognized
under our April 2008 agreement with Cubist.

Research and Development.
Our research and development expenses for the 2009 and 2008 Periods were
$30.7 million and $35.1 million, respectively.
Our research and development expenses arise primarily from compensation
and other related costs for our personnel dedicated to research and development
activities, fees paid and costs reimbursed to outside parties to conduct
research and clinical trials and the cost of manufacturing drug material prior
to FDA approval. The 2009 decrease in research and development expenses was
primarily related to cost savings of approximately $4.7 million as a result
of the workforce reduction in March 2009 and $2.0 from the closure
of our research facility in Liege, Belgium at the end of
the 2008 Period. In addition, clinical
trial costs decreased by approximately $4.5 million

during the 2009 Period,
as we completed our EDEMA4 trial in 2008.
These decreases were offset by an increase in costs of $8.0 million associated
with the manufacture of drug substance.

General and
Administrative. Our
general and administrative expenses consist primarily of the costs of our
management and administrative staff, as well as expenses related to business
development, protecting our intellectual property, administrative occupancy,
professional fees, market research, promotion activities and the reporting
requirements of a public company. General and administrative expenses were
$13.0 million for the 2009 Period compared to $10.8 million for the 2008
Period. The higher general and
administrative costs in 2009 were primarily due to an increase in
infrastructure to support plans for commercialization of DX-88 for HAE and a $1.1
million charge for share-based compensation expense for amendments to the
exercise and vesting schedules of certain options, as required under SFAS No. 123R.

Restructuring and
Impairment. In March 2009, we implemented a
workforce reduction to focus our resources on the commercialization of DX-88
and to support our long-term financial success.
As a result, during the first quarter of 2009, we recorded one-time
restructuring charges related to the workforce reduction of approximately $1.9
million.We expect the reduction in personnel costs, along with
other external costs, will result in approximately $18.0 million in annual
savings.

During the six months ended June 30, 2008, we
incurred restructuring fees of $3.8 million, and recorded an impairment charge
related to fixed assets of $352,000. These were solely due to the closing
of our Liege based research facility.

Liquidity and Capital Resources

June 30, 2009

December 31, 2008

(in thousands)

Cash and cash equivalents

$

37,559

$

27,668

Short-term investments

15,565

30,792

Long-term investments

2,486



Total cash, cash
equivalents and investments

$

55,610

$

58,460

The following table summarizes our cash flow activity
for the six months ended June 30, 2009 and 2008 (in thousands):

Six Months Ended June 30,

2009

2008

Net cash (used in)
provided by operating activities

$

(30,542

)

$

7,769

Net cash provided by
investing activities

12,092

5,064

Net cash provided by (used
in) financing activities

28,292

(3,530

)

Effect of foreign currency
translation on cash balances

49

(71

)

Net increase (decrease) in cash and cash
equivalents

$

9,891

$

9,232

We require cash to fund
our operating expenses, to make capital expenditures, acquisitions and
investments, and to service debt. Through June 30, 2009, we have funded
our operations principally through the sale of equity securities, which have
provided aggregate net cash proceeds since inception of approximately $314
million. We have also borrowed funds,
currently under our loan agreement with Cowen Healthcare, which are secured by
our LFRP. In addition, we generate funds
from product

development and license fees. Our excess funds are currently invested in
short-term investments primarily consisting of U.S. Treasury notes and bills
and money market funds backed by U.S. Treasury obligations.

Operating Activities

The principal use of cash
in our operations was to fund our net loss, which was $39.3 million during the
six months ended June 30, 2009. Of this net loss, certain costs were
non-cash charges, such as depreciation and amortization costs of $1.6 million,
and stock-based compensation expense under FAS 123(R) of $3.6
million. In addition to non-cash
charges, we also had a net change in other operating assets and liabilities of
$1.9 million, including a decrease in accounts receivable of $2.3 million,
offset by a decrease in accounts payable and accrued expenses of $1.4 million.

For 2008, our net loss
was $46.2 million, of which certain costs were non-cash charges such as
depreciation and amortization of $1.7 million, interest expense of $3.5
million, and stock-based compensation expense under FAS 123(R) of
$2.2 million and certain revenues for which we received payments totaling $42.2
million, which were deferred for financial reporting purposes.

The increase in net cash
used in operating activities from 2008 to 2009 was $38.3 million, primarily due
to approximately $43 million in cash receipts recorded as deferred revenue in
the 2008 Period. These receipts were
primarily related to the signing of license agreements with Cubist and
sanofi-aventis, which did not recur in the 2009 Period.

Investing Activities

Our investing activities
for the six months ended June 30, 2009, consisted of investment maturities
totaling of approximately $23.5 million, offset by purchases of additional
short-term and long-term securities of $11.0 million and the purchase of approximately
$397,000 of fixed assets.

Our investing activities
for 2008 included a $1.6 million decrease in restricted cash resulting from a
contractual reduction of our letter of credit that serves as our security
deposit for the lease of our facility in Cambridge, Massachusetts. This was
offset by a $1.2 million purchase of fixed assets, and the timing of the
maturity of our short-term investments.

Financing Activities

Our financing activities
for the six months ended June 30, 2009, consisted of net proceeds of $14.8
million from the Tranche B loan with Cowen Healthcare, as well as approximately
$17.6 million of net proceeds from the sale of 9,280,570 shares of our common
stock, and a $4.3 million repayment of long-term obligations, primarily
principal payments to Cowen Healthcare.
During the 2009 Period, we amended our existing loan with Cowen
Healthcare to receive an additional loan of $15 million. This Tranche B loan is secured by our LFRP on
the same terms as the initial Tranche A loan, which was executed in August 2008. The Tranche B loan, which matures in August 2016,
bears interest at an annual rate of 21.50%, payable quarterly, resulting in a
blended interest rate of 17.38% per annum for both the Tranche A and Tranche B
loans under the amended loan agreement.

Our financing activities
for 2008 primarily consist of the repayment of long-term obligations of $5.0
million, including payments made to Paul Royalty under our then existing
Royalty Interest Assignment Agreement, partially offset by proceeds from
long-term obligations of $1.1 million and proceeds from the issuance of common
stock under the 1998 Employee Stock Purchase Plan and the exercise of stock
options.

We have financed fixed
asset purchases through capital leases and debt. Capital lease obligations are
collateralized by the assets under lease.

In
October 2008, we entered into an equity line of credit arrangement with
Azimuth Opportunity Ltd. (Azimuth).
We entered into a Common Stock Purchase Agreement with Azimuth (the
Purchase Agreement), which provides that Azimuth is committed to purchase up to
$50.0 million of our common stock, or the number of shares which is one
share less than twenty percent of the issued and outstanding shares of our
common stock as of October 30, 2008, which is subject to automatic
reduction in certain circumstances, over the approximately 18-month term of the
Purchase Agreement. From time to time during the term of the Purchase
Agreement, and at our sole discretion, we may present Azimuth with draw down
notices to purchase our common stock over 10 consecutive trading days or such
other period
mutually agreed upon by us and Azimuth. Each draw down is subject to
limitations based on the price of our common stock and a limit of 2.5% of our
market capitalization at the time of such draw down, provided, however, Azimuth
will not be required to purchase more than approximately $7.7 million of
our common stock in any single draw down excluding shares under any call
option, as described below. We are able to present Azimuth with up to 24 draw
down notices during the term of the Purchase Agreement, with a minimum of five
trading days required between each draw down period. Unless otherwise agreed by
us and Azimuth, only one draw down is allowed in each draw down pricing period,
with a minimum price of $2.00 per share, less agreed upon discount. As of June 30, 2009, Azimuth was committed
to purchase up to $48.4 million of our common stock under the Purchase
Agreement, if, at our sole discretion, we present draw down notices.

We have managed our cash
burn by completing partnerships, collaborations, strategic transactions and by
reducing internal and external costs. We
expect that existing cash, cash equivalents, and short-term and long-term
investments, together with anticipated cash flow from existing product
development, collaborations and license agreements will be sufficient to
support our current operations well into 2010.
We will need additional funds if our cash requirements exceed our
current expectations or if we generate less revenue than we expect during this
period.

We may seek additional
funding through our existing equity line of credit agreement with Azimuth,
collaborative arrangements and public or private financings. We may not be able to obtain financing on
acceptable terms or at all, and we may not be able to enter into additional
collaborative arrangements. Arrangements with collaborators or others may
require us to relinquish rights to certain of our technologies, product
candidates or products. The terms of any financing may adversely affect the
holdings or the rights of our stockholders. If we need additional funds and are
unable to obtain funding on a timely basis, we would curtail significantly our
research, development or commercialization programs in an effort to provide
sufficient funds to continue our operations, which could adversely affect our
business prospects.

OFF BALANCE SHEET
ARRANGEMENTS

We have no off-balance
sheet arrangements with the exception of operating leases.

COMMITMENTS
AND CONTINGENCIES

In
our Annual Report on Form 10-K for the year ended December 31, 2008, Part II,
Item 7, Managements Discussion and Analysis of Financial Conditions and
Results of Operations, under the heading Contractual Obligations, we
described our commitments and contingencies. During the six months ended June 30,
2009, we amended the note payable with Cowen Healthcare and were issued an
additional $15 million of debt under the Tranche B loan (see Item I, Notes to
the Consolidated Financial Statements, Note 6, Note Payable). There were no other material changes in our
commitments and contingencies during the six months ended June 30, 2009.

In
our Annual Report on Form 10-K for the year ended December 31, 2008,
our critical accounting policies and estimates were identified as those
relating to revenue recognition, allowance for doubtful accounts, share-based
compensation and valuation of long-lived and intangible assets. There have been no material changes to our
critical accounting policies from the information provided in our 2008 Annual
Report on Form 10-K.

Item
3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market
risk consists primarily of our cash and cash equivalents, and short-term and
long-term investments. We place our investments in high-quality financial
instruments, primarily U.S. Treasury notes and bills, which we believe are
subject to limited credit risk. We currently do not hedge interest rate
exposure. As of June 30, 2009, we had cash, cash equivalents, short-term
and long-term investments of approximately $55.6 million. Our investments will
decline by an immaterial amount if market interest rates increase, and
therefore, our exposure to interest rate changes is immaterial. Declines of
interest rates over time will, however, reduce our interest income from our
investments.

As of June 30, 2009,
we had $61.8 million outstanding under short-term and long-term obligations,
including our note payable. Interest rates on all of these obligations are
fixed and therefore are not subject to interest rate fluctuations.

Most of our transactions
are conducted in U.S. dollars. We have collaboration and technology license
agreements with parties located outside of the United States. Transactions
under certain of the agreements between us and parties located outside of the
United States are conducted in local foreign currencies. If exchange rates
undergo a change of up to 10%, we do not believe that it would have a material
impact on our results of operations or cash flows.

Item 4 - CONTROLS AND PROCEDURES

Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures

Our
management, with the participation of our principal executive officer and
principal financial officer, has evaluated the effectiveness of the design and operation
of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) promulgated
under the Securities Exchange Act of 1934). Based on this evaluation, our
principal executive officer and principal financial officer concluded that these
disclosure controls and procedures were effective as of the end of the period
covered by this quarterly report.

Changes
in Internal Control over Financial Reporting

There
was no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act) identified in connection with the
evaluation of our internal control that occurred during our fiscal quarter
ended June 30, 2009 that has materially affected, or is reasonably likely
to materially affect, our internal control over financial reporting.

PART II
 OTHER INFORMATION

Item 1a  RISK FACTORS

Forward-looking
statements

This Quarterly Report on Form 10-Q
contains forward-looking statements, including statements about our reply to
the FDAs complete response regarding the BLA for DX-88, our future cash
resources, our growth and future operating results, discovery and development
of products, strategic alliances and intellectual property. Any statement that
is not a statement of historical fact should be considered a

forward-looking
statement. We often use the words or phrases of expectation or uncertainty like
believe, anticipate, plan, expect, intend, project, future, may,
will, could, would and similar words to help identify forward-looking
statements.

Statements that are not
historical facts are based on our current expectations and beliefs including
our assumptions, estimates, forecasts and projections for our business and the
industry and markets in which we compete. These statements are not guarantees
of future performance and involve certain risks, uncertainties and assumptions,
which are difficult to predict. We cannot assure investors that our
expectations and beliefs will prove to have been correct. Important factors
could cause our actual results to differ materially from those indicated or
implied by forward-looking statements. Factors that could cause or contribute
to such differences include the factors discussed below. We caution you not to
place undue reliance on these forward looking statements, which speak only as
of the date on which they are made. We undertake no intention or obligation to
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by law.

Risks Related To Our Business

We have a history of net losses, expect to incur significant
additional net losses and may never achieve or sustain profitability.

We have incurred net losses since
our inception in 1989. We incurred net losses of $39.3 million and $46.2
million for the six months ended June 30, 2009 and 2008, respectively, and
net losses of $66.5 million, $56.3 million and $50.3 million for the years
ended December 31, 2008, 2007 and 2006, respectively. As of June 30,
2009, we had an accumulated deficit of approximately $394.7 million. We expect
to incur substantial additional net losses over the next several years as our
research, development, preclinical testing, clinical trial and commercial
activities increase, particularly with respect to our current lead product
candidate, DX-88.

We have not generated any
revenue from product sales to date, and it is possible that we will never have
significant, if any, product sales revenue. Currently, we generate revenue from
collaborators through license and milestone fees, research and development
funding, and maintenance fees that we receive in connection with the licensing
of our phage display technology. To become profitable, we, either alone or with
our collaborators, must successfully develop, manufacture and market our
current product candidates, including DX-88, and other products and continue to
leverage our phage display technology to generate research funding and
licensing revenue. It is possible that we will never have significant product
sales revenue or receive significant royalties on our licensed product candidates
or licensed technology in order to achieve or sustain future profitability.

We will need substantial additional capital
in the future and may be unable to raise the capital that we will need to
sustain our operations.

·the timing and cost to develop, obtain regulatory
approvals for and commercialize our product candidates, including the cost of
developing sales and marketing capabilities prior to receipt of any regulatory
approval of our product candidates;

·future levels of commercial product sales, if any;

·maintaining or expanding our existing collaborative
and license arrangements and entering into additional arrangements on terms
that are favorable to us;

We
expect that existing cash, cash equivalents, and short-term investments together
with anticipated cash flow from existing product development, collaborations
and license fees will be sufficient to support our current operations well into
2010. We will need additional funds if our cash requirements exceed our current
expectations or if we generate less revenue than we expect.

We
may seek additional funding through our existing equity line of credit,
collaborative arrangements and public or private financings. We may not be able
to obtain financing on acceptable terms or at all, and we may not be able to
enter into additional collaborative arrangements. Arrangements with
collaborators or others may require us to relinquish rights to certain of our
technologies, product candidates or products. The terms of any financing may
adversely affect the holdings or the rights of our stockholders and if we are
unable to obtain funding on a timely basis, we may be required to curtail
significantly our research, development or commercialization programs which
could adversely affect our business prospects.

Government regulation of drug development
is costly, time consuming and fraught with uncertainty, and our products in
development cannot be sold if we do not gain regulatory approval.

We
and our licensees and partners conduct research, preclinical testing and
clinical trials for our product candidates. These activities are subject to
extensive regulation by numerous state and federal governmental authorities in
the United States, such as the FDA, as well as foreign countries, such as the
EMEA in European countries, Canada and Australia. Currently, we are required in
the United States and in foreign countries to obtain approval from those
countries regulatory authorities before we can manufacture (or have our
third-party manufacturers produce), market and sell our products in those
countries. The FDA and other U.S. and foreign regulatory agencies have
substantial authority to fail to approve commencement of, suspend or terminate
clinical trials, require additional testing and delay or withhold registration
and marketing approval of our product candidates.

Obtaining
regulatory approval has been and continues to be increasingly difficult and
costly and takes many years, and if obtained is costly to maintain. With the
occurrence of a number of high profile safety events with certain
pharmaceutical products, regulatory authorities, and in particular the FDA,
members of Congress, the US Government Accountability Office (GAO),
Congressional committees, private health/science foundations and organizations,
medical professionals, including physicians and investigators, and the general
public are increasingly concerned about potential or perceived safety issues
associated with pharmaceutical and biological products, whether under study for
initial approval or already marketed.

This
increasing concern has produced greater scrutiny, which may lead to fewer
treatments being approved by the FDA or other regulatory bodies, as well as
restrictive labeling of a product or a class of

products
for safety reasons, potentially including a boxed warning or additional
limitations on the use of products, pharmacovigilance programs for approved
products or requirement of risk management activities related to the promotion
and sale of a product.

The
complete response letter that we received from the FDA in March 2009
pertaining to our BLA for DX-88, required a REMS and additional information
with respect to the CMC section of the BLA.
While we have developed a REMS program for DX-88,and included it in our
response to the FDAs complete response letter, along with our responses to
their other information requests, we cannot predict what risk management
activities the FDA may require of us or whether the FDA will accept our REMS
program.

If
regulatory authorities determine that we or our licensees or partners
conducting research and development activities on our behalf have not complied
with regulations in the research and development of a product candidate, new
indication for an existing product or information to support a current
indication, then they may not approve the product candidate or new indication
or maintain approval of the current indication in its current form or at all,
and we will not be able to market and sell it. If we were unable to market and
sell our product candidates, our business and results of operations would be
materially and adversely affected.

The FDA is requiring us to implement a Risk Evaluation and Mitigation
Strategy for DX-88 and to perform additional post-marketing studies.
Additionally, the FDA or similar agencies in other jurisdictions may require us restrict the distribution of DX-88 or take other potentially limiting or costly actions if we or others
identify side effects after our products are on the market.

The
FDA is requiring that we implement a REMS for DX-88 and conduct post-marketing
studies to assess a risk of hypersensitivity reactions, including anaphylaxis.
The REMS will include a medication guide, a patient package insert, a
communication plan to healthcare providers, and other elements of safe use as
the FDA may deem necessary to assure safe use of the drug, which could include
imposing certain restrictions on distribution or use of DX-88.

Regulatory
agencies could change existing regulations, or promulgate new ones at any time
that may affect our ability to obtain or maintain approval of our existing or
future products or require significant additional costs to obtain or maintain
such approvals.

Even if we obtain regulatory approval, our
biopharmaceutical products will continue to be subject to governmental review.
If we, or our suppliers, fail to comply with FDA or other government regulations,
our business, financial condition, and results of operations would be adversely
affected.

Even
if regulatory approval is obtained, our biopharmaceutical products will
continue to be subject to extensive and rigorous regulation by the FDA and comparable
foreign authorities. These regulations govern, among other things, the
manufacturing, labeling, storage, advertising, promotion, distribution, and
sales of our products.

Previously
unidentified adverse events or an increased frequency of adverse events that
may occur post-approval could result in a requirement for labeling
modifications of approved products, which could adversely affect future
marketing. Approvals may be withdrawn if compliance with regulatory standards
is not maintained or if problems occur following initial marketing. Later
discovery of previously unknown problems with a product, manufacturer or
facility may result in the FDA and/or other regulatory agencies requiring
further clinical research or restrictions on the product or the manufacturer,
including withdrawal of the drug product from the market.

In
addition, the facilities used by our contract manufacturers to manufacture our
product candidates must be approved by the FDA. If our contract manufacturers
cannot successfully manufacture material that conforms to our specifications
and the FDAs strict regulatory requirements, they will not be

able
to secure required FDA approval for the manufacturing facilities. Our contract
manufacturers will be subject to ongoing periodic unannounced inspections by
the FDA and corresponding state and foreign agencies for compliance with cGMP
and similar regulatory requirements. Failure by any of our contract
manufacturers to comply with applicable regulations could result in sanctions
being imposed on us, including fines, injunctions, civil penalties, failure to
grant approval to market our product candidates, delays, suspensions or
withdrawals of approvals, operating restrictions and criminal prosecutions, any
of which could significantly and adversely affect our business.

The
restriction, suspension, or revocation of regulatory approvals or any other
failure to comply with regulatory requirements could have a material adverse
effect on our business, financial condition, and results of operations.

If we
are unable to develop effective independent sales and marketing capabilities or
establish third-party relationships for the commercialization of our drug
candidates, we will not be able to successfully commercialize DX-88, even if we
are able to obtain regulatory approval.

We currently have limited
experience as a company in sales and marketing or with respect to pricing and
obtaining adequate third-party reimbursement for drug use. We will need to either develop marketing
capabilities and an independent sales force or enter into arrangements with
third parties to sell and market DX-88, if it is approved for sale by
regulatory authorities.

In
order to market DX-88 for acute attacks of HAE in the United States if it is
approved, we intend to build a marketing organization and a specialized sales
force, which will require substantial efforts and significant management and
financial resources. While we intend to
stage our commitments to the extent possible in consideration of the
development and regulatory timelines, in order to support an effective launch
of DX-88, we will need to make significant financial commitments to our
marketing organization prior to receiving regulatory approval. We will need to devote significant effort, in
particular, to recruiting individuals with experience in sales and marketing of
pharmaceutical products. Competition for
personnel with these skills is high. As
a result, we may not be able to successfully develop our own marketing
capabilities or independent sales force for DX-88 in the United States in order
to support an effective launch of DX-88 if it is approved for sale. We may also be unable to enter into third
party arrangements for the marketing and sale of DX-88.

As
a result, we may experience delays in the commercialization of DX-88 and we may
be unable to compete effectively which would adversely impact our business,
operating results and financial condition.

Our biopharmaceutical product candidates
must undergo rigorous clinical trials which could substantially delay or
prevent their development or marketing.

Before
we can commercialize any biopharmaceutical product, we must engage in a
rigorous clinical trial and regulatory approval process mandated by the FDA and
analogous foreign regulatory agencies. This process is lengthy and expensive,
and approval is never certain. Positive results from preclinical studies and
early clinical trials do not ensure positive results in late stage clinical
trials designed to permit application for regulatory approval. We cannot
accurately predict when planned clinical trials will begin or be completed.
Many factors affect patient enrollment, including the size of the patient
population, the proximity of patients to clinical sites, the eligibility
criteria for the trial, alternative therapies, competing clinical trials and
new drugs approved for the conditions that we are investigating. For example,
four other companies have been conducting clinical trials of treatments for
HAE, and this may have caused delays in recruitment for our HAE trials. As a
result of all of these factors, our future trials may take longer to enroll patients
than we anticipate. Such delays may increase our costs and slow down our
product development and the regulatory approval process. Our product
development costs will also increase if we need to perform more or larger
clinical trials than planned. The occurrence of any of these events will delay
our ability to commercialize products, generate revenue from product sales and
impair our ability to become profitable, which may cause us to have
insufficient capital resources to support our operations.

Products
that we or our collaborators develop could take a significantly longer time to
gain regulatory approval than we expect or may never gain approval. If we or
our collaborators do not receive these necessary approvals, we will not be able
to generate substantial product or royalty revenues and may not become
profitable. We and our collaborators may encounter significant delays or
excessive costs in our efforts to secure regulatory approvals. Factors that
raise uncertainty in obtaining these regulatory approvals include the
following:

·we must demonstrate through clinical trials that the proposed product
is safe and effective for its intended use;

·we have limited experience in conducting the clinical trials necessary
to obtain regulatory approval; and

·data obtained from preclinical and clinical activities are subject to
varying interpretations, which could delay, limit or prevent regulatory
approvals.

Regulatory
authorities may delay, suspend or terminate clinical trials at any time if they
believe that the patients participating in trials are being exposed to
unacceptable health risks or if they find deficiencies in the clinical trial
procedures. Our IND Applications for our recombinant protein DX-88, for
example, were placed on clinical hold by the FDA in May 2004, following
the FDAs evaluation of certain animal test data submitted by us. Although that
study was allowed to continue, we were required by the FDA to conduct
additional testing at additional expense. There is no guarantee that we will be
able to resolve similar issues in the future, either quickly, or at all. In
addition, our or our collaborators failure to comply with applicable
regulatory requirements may result in criminal prosecution, civil penalties and
other actions that could impair our ability to conduct our business.

We lack experience in and/or capacity for
conducting clinical trials and handling regulatory processes. This lack of
experience and/or capacity may adversely affect our ability to commercialize
any biopharmaceuticals that we may develop.

We
have hired experienced clinical development and regulatory staff to develop and
supervise our clinical trials and regulatory processes. However, we will remain
dependent upon third party contract research organizations to carry out some of
our clinical and preclinical research studies for the foreseeable future. As a
result, we have had and will continue to have less control over the conduct of
the clinical trials, the timing and completion of the trials, the required
reporting of adverse events and the management of data developed through the
trials than would be the case if we were relying entirely upon our own staff.
Communicating with outside parties can also be challenging, potentially leading
to mistakes as well as difficulties in coordinating activities. Outside parties
may have staffing difficulties, may undergo changes in priorities or may become
financially distressed, adversely affecting their willingness or ability to
conduct our trials. For example, in 2008, the contract research organization
collecting and assembling the data from our EDEMA4 trial announced that it was
terminating that line of business, which forced us to find a new contractor and
delay the filing of our BLA for HAE by almost two months. We may also
experience unexpected cost increases that are beyond our control.

Problems
with the timeliness or quality of the work of a contract research organization
may lead us to seek to terminate the relationship and use an alternative
service provider. However, changing our service provider may be costly and may
delay our trials, and contractual restrictions may make such a change difficult
or impossible. Additionally, it may be impossible to find a replacement
organization that can conduct our trials in an acceptable manner and at an
acceptable cost.

Because we currently lack the resources,
capability and experience necessary to manufacture biopharmaceuticals, we will
depend on third parties to perform this function, which may adversely affect
our ability to commercialize any biopharmaceuticals we may develop.

We
do not currently operate manufacturing facilities for the clinical or
commercial production of biopharmaceuticals and do not plan to have that
capacity for the foreseeable future. We also lack the resources, capability and
experience necessary to manufacture biopharmaceuticals. As a result, we depend
on collaborators, partners, licensees and other third parties to manufacture
clinical and commercial scale quantities of our biopharmaceutical candidates in
a timely and effective manner and in accordance with government regulations. If
these third party arrangements are not successful, it will adversely affect our
ability to develop, obtain regulatory approval for or market our product
candidates.

We
have identified only a few facilities that are capable of producing material
for preclinical and clinical studies and we cannot assure you that they will be
able to supply sufficient clinical materials during the clinical development of
our biopharmaceutical candidates. There is no assurance that contractors will
have the capacity to manufacture or test our products at the required scale and
within the required time frame or that the supply of clinical materials can be
maintained during the clinical development of our biopharmaceutical candidates.

We
are dependent on a single contract manufacturer to produce drug substance for
DX-88 for HAE, if it is approved for sale. This manufacturer will be subject to
ongoing periodic inspection by the FDA and corresponding foreign agencies to
ensure strict compliance with current good manufacturing practices and other
governmental regulations and standards. We have limited control over our
contract manufacturer and its ability to maintain adequate quality control,
quality assurance and qualified personnel. Failure by our contract manufacturer
to comply with or to adequately maintain any of these standards could adversely
affect our ability to further develop, obtain regulatory approval for or market
DX-88 and would adversely impact our business.

If we are unable to find distributors for
our DX-88 product candidate outside the United States, we may be unable to
generate significant revenues from, or recoup our investments in, DX-88.

We
are familiar with the HAE patient community and its relatively small number of
treating allergists, and we believe the optimal commercialization strategy for
the HAE indication is to build an internal sales team to promote DX-88 in the
United States and to establish regional collaborations for distribution in
other major market countries. If we are not able to find a suitable distributor
or distributors, or if we are unable to negotiate acceptable terms for
distribution, we may not be able to fully develop and commercialize DX-88,
which would adversely affect our business prospects and the value of our common
stock.

We
have a loan with Cowen Healthcare which has an aggregate principal balance of
$59.7 million at June 30, 2009. The loan bears interest at a rate of 16%
per annum for Tranche A and 21.5% per annum for Tranche B payable quarterly,
all of which matures in August 2016. In connection with the loan, we have
entered into a security agreement granting Cowen Healthcare a security interest
in substantially all of the assets related to our LFRP. We are required to
repay the loan based on a percentage of LFRP related revenues, including
royalties, milestones, and license fees received by us under the LFRP. If the
LFRP revenues for any quarterly period are insufficient to cover the cash
interest due for that period, the deficiency may be added to the outstanding
loan principal or paid in cash by us. We may prepay the loan in whole or in
part at any time after August 2012.
In the event of certain changes of control or mergers or sales of all or
substantially all of our assets, any or all of the loan may become due and
payable at Cowen Healthcares option, including a prepayment premium prior to August 2012.
We must comply with certain loan covenants which if not observed could make all
loan principal, interest and all other amounts payable under the loan
immediately due and payable.

Our
obligations under the Cowen Healthcare agreement require that we dedicate a
substantial portion of cash flow from our LFRP receipts to service the loan,
which will reduce the amount of cash flow

available
for other purposes. If the LFRP fails to generate sufficient receipts to fund
quarterly principal and interest payments to Cowen, we will be required to fund
such obligations from cash on hand or from other sources, further decreasing
the funds available to operate our business. In the event that amounts due
under the loan are accelerated, payment would significantly reduce our cash,
cash equivalents and short-term investments and we may not have sufficient
funds to pay the debt if any of it is accelerated.

As
a result of the security interest granted to Cowen Healthcare, we may not sell
our rights to part or all of those assets, or take certain other actions,
without first obtaining permission from Cowen. This requirement could delay,
hinder or condition our ability to enter into corporate partnerships or
strategic alliances with respect to these assets.

The
obligations and restrictions under the Cowen Healthcare agreement may limit our
operating flexibility, make it difficult to pursue our business strategy and
make us more vulnerable to economic downturns and adverse developments in our
business.

If we fail to establish and maintain
strategic license, research and collaborative relationships, or if our
collaborators are not able to successfully develop and commercialize product
candidates, our ability to generate revenues could be adversely affected.

Our
business strategy includes leveraging certain product candidates, as well as
our proprietary phage display technology, through collaborations and licenses
that are structured to generate revenues through license fees, technical and
clinical milestone payments, and royalties. We have entered into, and
anticipate continuing to enter into, collaborative and other similar types of
arrangements with third parties to develop, manufacture and market drug
candidates and drug products.

In
addition, for us to continue to receive any significant payments from our LFRP
related licenses and collaborations and generate sufficient revenues to meet
the required payments under our agreement with Cowen Healthcare, the relevant
product candidates must advance through clinical trials, establish safety and
efficacy, and achieve regulatory approvals, obtain market acceptance and
generate revenues.

Reliance
on license and collaboration agreements involves a number of risks as our
licensees and collaborators:

·may not perform their obligations as expected, or may
pursue alternative technologies or develop competing products;

·control many of the decisions with respect to
research, clinical trials and commercialization of product candidates we
discover or develop with them or have licensed to them;

·may terminate their collaborative arrangements with us
under specified circumstances, including, for example, a change of control,
with short notice; and

·may disagree with us as to whether a milestone or
royalty payment is due or as to the amount that is due under the terms of our
collaborative arrangements.

We
cannot assure you that we will be able to maintain our current licensing and
collaborative efforts, nor can we assure the success of any current or future
licensing and collaborative relationships. An inability to establish new
relationships on terms favorable to us, work successfully with current licensees
and collaborators, or failure of any significant portion of our LFRP related
licensing and collaborative efforts would result in a material adverse impact
on our business, operating results and financial condition.

Product liability and other claims against
us may reduce demand for our product candidates or result in substantial
damages.

We
face an inherent risk of product liability exposure related to testing our
product candidates in human clinical trials and will face even greater risks if
we sell our product candidates commercially.

An
individual may bring a product liability claim against us if one of our product
candidates causes, or merely appears to have caused, an injury. Moreover, in
some of our clinical trials, we test our product candidates in indications
where the onset of certain symptoms or attacks could be fatal. Although the
protocols for these trials include emergency treatments in the event a patient
appears to be suffering a potentially fatal incident, patient deaths may
nonetheless occur. As a result, we may face additional liability if we are
found or alleged to be responsible for any such deaths.

These
types of product liability claims may result in:

·decreased demand for our product candidates;

·injury to our reputation;

·withdrawal of clinical trial volunteers;

·related litigation costs; and

·substantial monetary awards to plaintiffs.

Although
we currently maintain product liability insurance, we may not have sufficient
insurance coverage, and we may not be able to obtain sufficient coverage at a
reasonable cost. Our inability to obtain product liability insurance at an
acceptable cost or to otherwise protect against potential product liability
claims could prevent or inhibit the commercialization of any products that we
or our collaborators develop. If we are successfully sued for any injury caused
by our products or processes, then our liability could exceed our product
liability insurance coverage and our total assets.

We and our collaborators may not be able to
gain market acceptance of our biopharmaceutical product candidates, which could
adversely affect our revenues.

We
cannot be certain that any of our biopharmaceutical product candidates, even if
successfully approved by the regulatory authorities, will gain market
acceptance among physicians, patients, healthcare payors, or others. We may not
achieve market acceptance even if clinical trials demonstrate safety and
efficacy of our biopharmaceutical candidates and the necessary regulatory and
reimbursement approvals are obtained. The degree of market acceptance of our
biopharmaceutical candidates will depend on a number of factors, including:

·market penetration and pricing strategies of competing
and future products.

If
our products do not achieve significant market acceptance, our potential future
revenues could be adversely affected which would have a material adverse effect
on our business, financial condition, and results of operations.

Competition and technological change may
make our potential products and technologies less attractive or obsolete.

We
compete in industries characterized by intense competition and rapid
technological change. New developments occur and are expected to continue to
occur at a rapid pace. Discoveries or commercial developments by our
competitors may render some or all of our technologies, products or potential
products obsolete or non-competitive.

Our
principal focus is on the development of human therapeutic products. We plan to
conduct research and development programs to develop and test product
candidates and demonstrate to appropriate regulatory agencies that these
products are safe and effective for therapeutic use in particular indications.
Therefore our principal competition going forward, as further described below,
will be companies who either are already marketing products in those
indications or are developing new products for those indications. Many of our
competitors have greater financial resources and experience than we do.

For
DX-88 as a treatment for HAE, our principal competitors include:

·ViroPharma Inc.In October 2008, ViroPharma
received FDA approval for its plasma-derived C1-esterase inhibitor, known as
Cinryze, which is administered intravenously. Cinryze was approved for routine
prophylaxis against angioedema attacks in adolescent and adult patients with
HAE, and has orphan drug designation from the FDA. Cinryze was launched in December 2008.
ViroPharma also submitted a supplemental Biologics License Application to the
FDA for the use of Cinryze as a treatment for acute attacks of HAE, and on June 3,
2009, the FDA issued a complete response letter requesting that ViroPharma
conduct an additional clinical study.

·Jerini AG/Shire plcJerini AG has filed for
market approval from the FDA and EMEA for its bradykinin receptor antagonist,
known as Firazyr®, which is delivered by subcutaneous injection. In July 2008,
the European Commission approved an MAA for Firazyr. In April 2008, the
FDA issued a Not Approvable letter for Firazyr. Firazyr has orphan drug
designations from both the FDA and EMEA. Jerini/Shire has announced plans to
initiate a new Phase 3 clinical trial in the third quarter of 2009.

·CSL BehringCSL Behring currently markets Berinert®, a
plasma-derived C1-esterase inhibitor that is approved for the treatment of HAE
in several European countries. CSL Behring received an orphan drug designation
from the FDA for its plasma-derived C1-esterase inhibitor and filed for market
approval with the FDA. In December 2008, CSL Behring received a complete
response letter from the FDA posing questions related to manufacturing and
clinical sections of the application.

·Pharming Group NV Pharming filed for market
approval from the EMEA for its recombinant C1-esterase inhibitor, known as
Rhucin®, which is delivered intravenously. Rhucin has Fast Track status from
the FDA and orphan drug designations from both the FDA and EMEA. In December 2007
and March 2008, Pharming received negative opinions from the EMEA.
Pharming announced plans to submit its MAA to the EMEA in September 2009
and for a pre-BLA filing meeting with the FDA in the second half of 2009.

Other
competitors include companies that market or are developing corticosteroid
drugs or other anti-inflammatory compounds.

The
principal competitors for DX-88 as a treatment for reducing blood loss in
cardiothoracic surgery procedures, are manufacturers of aminocaproic acid, a
drug used in this indication. A number of other organizations, including Novo
Nordisk A/S, Vanderbilt University and The Medicines Company, are developing
other products for this indication.

For
our potential oncology product candidates, our potential competitors include
numerous pharmaceutical and biotechnology companies, many of which have greater
financial resources and experience than we do.

In
addition, most large pharmaceutical companies seek to develop orally available
small molecule compounds against many of the targets for which we and others
are seeking to develop antibody, peptide and/or small protein products.

Our
phage display technology is one of several technologies available to generate
libraries of compounds that can be leveraged to discover new antibody, peptide
and/or small protein products. The primary competing technology platforms that
pharmaceutical, diagnostics and biotechnology companies use to identify
antibodies that bind to a desired target are transgenic mouse technology and
the humanization of murine antibodies derived from hybridomas. Medarex, Inc.,
Genmab A/S, and PDL Biopharma are leaders in these technologies. Further, other
companies such as BioInvent International AB and XOMA Ltd. have access to
phage display technology and compete with us by offering licenses and research
services to pharmaceutical and biotechnology companies.

In
addition, we may experience competition from companies that have acquired or
may acquire technology from universities and other research institutions. As
these companies develop their technologies, they may develop proprietary
positions that may prevent us from successfully commercializing our products.

Our success depends significantly upon our
ability to obtain and maintain intellectual property protection for our
products and technologies and upon third parties not having or obtaining
patents that would prevent us from commercializing any of our products.

We face risks and
uncertainties related to our intellectual property rights. For example:

·we may be unable to obtain or maintain patent or other intellectual
property protection for any products or processes that we may develop or have
developed;

·third parties may obtain patents covering the manufacture, use or sale
of these products or processes, which may prevent us from commercializing any
of our products under development globally or in certain regions; or

·our patents or any future patents that we may obtain may not prevent
other companies from competing with us by designing their products or
conducting their activities so as to avoid the coverage of our patents.

The
Companys patent rights relating to our phage display technology are central to
our LFRP. As part of our LFRP, we generally seek to negotiate license
agreements with parties practicing technology covered by our patents. In
countries where we do not have and/or have not applied for phage display patent
rights, we will be unable to prevent others from using phage display or
developing or selling products or technologies derived using phage display. In
addition, in jurisdictions where we have phage display patent rights, we may be
unable to prevent others from selling or importing products or technologies
derived

elsewhere
using phage display. Any inability to protect and enforce such phage display
patent rights, whether by any inability to license or any invalidity of our
patents or otherwise, could negatively affect future licensing opportunities
and revenues from existing agreements under the LFRP.

In
all of our activities, we also rely substantially upon proprietary materials,
information, trade secrets and know-how to conduct our research and development
activities and to attract and retain collaborators, licensees and customers.
Although we take steps to protect our proprietary rights and information,
including the use of confidentiality and other agreements with our employees
and consultants and in our academic and commercial relationships, these steps
may be inadequate, these agreements may be violated, or there may be no
adequate remedy available for a violation. Also, our trade secrets or similar
technology may otherwise become known to, or be independently developed or
duplicated by, our competitors.

Before
we and our collaborators can market some of our processes or products, we and
our collaborators may need to obtain licenses from other parties who have
patent or other intellectual property rights covering those processes or
products. Third parties have patent rights related to phage display,
particularly in the area of antibodies. While we have gained access to key
patents in the antibody area through the cross licenses with Affimed
Therapeutics AG, Affitech AS, Biosite Incorporated (now owned by Inverness
Medical Innovations), Cambridge Antibody Technology Limited (now known as
MedImmune Limited and owned by AstraZeneca), Domantis Limited (a wholly-owned
subsidiary of GlaxoSmithKline), Genentech, Inc. and XOMA Ireland Limited,
other third party patent owners may contend that we need a license or other
rights under their patents in order for us to commercialize a process or
product. In addition, we may choose to license patent rights from other third
parties. In order for us to commercialize a process or product, we may need to
license the patent or other rights of other parties. If a third party does not
offer us a needed license or offers us a license only on terms that are
unacceptable, we may be unable to commercialize one or more of our products. If
a third party does not offer a needed license to our collaborators and as a
result our collaborators stop work under their agreement with us, we might lose
future milestone payments and royalties, which would adversely affect us. If we
decide not to seek a license, or if licenses are not available on reasonable
terms, we may become subject to infringement claims or other legal proceedings,
which could result in substantial legal expenses. If we are unsuccessful in
these actions, adverse decisions may prevent us from commercializing the
affected process or products and could require us to pay substantial monetary
damages.

We
seek affirmative rights of license or ownership under existing patent rights
relating to phage display technology of others. For example, through our patent
licensing program, we have secured a limited freedom to practice some of these
patent rights pursuant to our standard license agreement, which contains a
covenant by the licensee that it will not sue us under certain of the licensees
phage display improvement patents. We cannot guarantee, however, that we will
be successful in enforcing any agreements from our licensees, including
agreements not to sue under their phage display improvement patents, or in
acquiring similar agreements in the future, or that we will be able to obtain
commercially satisfactory licenses to the technology and patents of others. If
we cannot obtain and maintain these licenses and enforce these agreements, this
could have a material adverse impact on our business.

Proceedings to obtain, enforce or defend
patents and to defend against charges of infringement are time consuming and
expensive activities. Unfavorable outcomes in these proceedings could limit our
patent rights and our activities, which could materially affect our business.

Obtaining,
protecting and defending against patent and proprietary rights can be
expensive. For example, if a competitor files a patent application
claiming technology also invented by us, we may have to participate in an
expensive and time-consuming interference proceeding before the United States
Patent and Trademark Office to address who was first to invent the subject
matter of the claim and whether that subject matter was patentable. Moreover,
an unfavorable outcome in an interference proceeding could require us to cease
using the technology or to attempt to license rights to it from the prevailing
party. Our business would be harmed if a prevailing third party does not offer
us a license on terms that are acceptable to us.

In
patent offices outside the United States, we may be forced to respond to third
party challenges to our patents. For example, our first phage display patent in
Europe, European Patent No. 436,597, known as the 597 Patent, was
ultimately revoked in 2002 in proceedings in the European Patent Office. We
have one divisional patent application of the 597 Patent pending in the
European Patent Office. We cannot be assured that we will prevail in the
prosecution of this patent application. We will not be able to prevent other
parties from using our phage display technology in Europe if the European
Patent Office does not grant us another phage display patent.

The
issues relating to the validity, enforceability and possible infringement of
our patents present complex factual and legal issues that we periodically
reevaluate. Third parties have patent rights related to phage display,
particularly in the area of antibodies. While we have gained access to key
patents in the antibody area through our cross-licensing agreements with
Affimed, Affitech, Biosite, Domantis, Genentech, XOMA and Cambridge Antibody
Technology Limited (now known as MedImmune Limited), other third party patent
owners may contend that we need a license or other rights under their patents
in order for us to commercialize a process or product. In addition, we may
choose to license patent rights from third parties. While we believe that we
will be able to obtain any needed licenses, we cannot assure you that these
licenses, or licenses to other patent rights that we identify as necessary in
the future, will be available on reasonable terms, if at all. If we decide not
to seek a license, or if licenses are not available on reasonable terms, we may
become subject to infringement claims or other legal proceedings, which could
result in substantial legal expenses. If we are unsuccessful in these actions,
adverse decisions may prevent us from commercializing the affected process or
products. Moreover, if we are unable to maintain the covenants with regard to
phage display improvements that we obtain from our licensees through our patent
licensing program and the licenses that we have obtained to third party phage
display patent rights, it could have a material adverse effect on our business.

We
would expect to incur substantial costs in connection with any litigation or
patent proceeding. In addition, our managements efforts would be diverted,
regardless of the results of the litigation or proceeding. An unfavorable
result could subject us to significant liabilities to third parties, require us
to cease manufacturing or selling the affected products or using the affected
processes, require us to license the disputed rights from third parties or
result in awards of substantial damages against us. Our business will be harmed
if we cannot obtain a license, can obtain a license only on terms we consider
to be unacceptable or if we are unable to redesign our products or processes to
avoid infringement.

In
all of our activities, we substantially rely on proprietary materials and
information, trade secrets and know-how to conduct research and development
activities and to attract and retain collaborative partners, licensees and
customers. Although we take steps to protect these materials and information,
including the use of confidentiality and other agreements with our employees
and consultants in both academic commercial relationships, we cannot assure you
that these steps will be adequate, that these agreements will not be violated,
or that there will be an available or sufficient remedy for any such violation,
or that others will not also develop the same or similar proprietary
information.

Our revenues and operating results have
fluctuated significantly in the past, and we expect this to continue in the
future.

Our
revenues and operating results have fluctuated significantly on a quarter to
quarter basis. We expect these fluctuations to continue in the future.
Fluctuations in revenues and operating results will depend on:

·the cost and timing of our increased research and
development, manufacturing and commercialization expenditures;

·the timing and results of clinical trials, including a
failure to receive the required regulatory approvals to commercialize our
product candidates;

·the timing, receipt and amount of payments, if any,
from current and prospective collaborators, including the completion of certain
milestones; and

·revenue recognition and other accepted accounting
policies.

Our
revenues and costs in any period are not reliable indicators of our future
operating results. If the revenues we receive are less than the revenues we
expect for a given fiscal period, then we may be unable to reduce our expenses
quickly enough to compensate for the shortfall. In addition, our fluctuating
operating results may fail to meet the expectations of securities analysts or
investors which may cause the price of our common stock to decline.

If we lose or are unable to hire and retain
qualified personnel, then we may not be able to develop our products or
processes.

We
are highly dependent on qualified scientific and management personnel, and we
face intense competition from other companies and research and academic
institutions for qualified personnel. If we lose an executive officer, a
manager of one of our principal business units or research programs, or a
significant number of any of our staff or are unable to hire and retain
qualified personnel, then our ability to develop and commercialize our products
and processes may be delayed which would have an adverse effect on our
business, financial condition, and results of operations.

We use and generate hazardous materials in
our business, and any claims relating to the improper handling, storage,
release or disposal of these materials could be time-consuming and expensive.

Our
phage display research and development involves the controlled storage, use and
disposal of chemicals and solvents, as well as biological and radioactive
materials. We are subject to foreign, federal, state and local laws and
regulations governing the use, manufacture and storage and the handling and disposal
of materials and waste products. Although we believe that our safety procedures
for handling and disposing of these hazardous materials comply with the
standards prescribed by laws and regulations, we cannot completely eliminate
the risk of contamination or injury from hazardous materials. If an accident
occurs, an injured party could seek to hold us liable for any damages that
result and any liability could exceed the limits or fall outside the coverage
of our insurance. We may not be able to maintain insurance on acceptable terms,
or at all. We may incur significant costs to comply with current or future
environmental laws and regulations.

Our business is subject to risks associated
with international contractors and exchange rate risk.

Since
the closing of our European subsidiary operations in 2008, none of our business
is conducted in currencies other than our reporting currency, the United States
dollar. We do, however, rely on an international contract manufacturer for the
production of our drug substance for DX-88. We recognize foreign currency gains
or losses arising from our transactions in the period in which we incur those
gains or losses. As a result, currency fluctuations among the United States
dollar and the currencies in which we do business have caused foreign currency
transaction gains and losses in the past and will likely do so in the future.
Because of the variability of currency exposures and the potential volatility
of currency exchange rates, we may suffer significant foreign currency
transaction losses in the future due to the effect of exchange rate
fluctuations.

Compliance with changing regulations
relating to corporate governance and public disclosure may result in additional
expenses.

Keeping
abreast of, and in compliance with, changing laws, regulations, and standards
relating to corporate governance and public disclosure, including the
Sarbanes-Oxley Act of 2002, new SEC regulations, and NASDAQ Global Market
rules, have required an increased amount of management attention and external
resources. We intend to invest all reasonably necessary resources to comply
with evolving corporate governance and public disclosure standards, and this
investment may result in increased general and administrative expenses and a
diversion of management time and attention from revenue-generating activities
to compliance activities.

We may not succeed in acquiring technology
and integrating complementary businesses.

We
may acquire additional technology and complementary businesses in the future.
Acquisitions involve many risks, any one of which could materially harm our
business, including:

·the loss of key employees from either our current
business or any acquired businesses; and

·the assumption of significant liabilities of acquired
businesses.

We may be unable to make
any future acquisitions in an effective manner. In addition, the ownership
represented by the shares of our common stock held by our existing stockholders
will be diluted if we issue equity securities in connection with any
acquisition. If we make any significant acquisitions using cash consideration,
we may be required to use a substantial portion of our available cash. If we
issue debt securities to finance acquisitions, then the debt holders would have
rights senior to the holders of shares of our common stock to make claims on
our assets and the terms of any debt could restrict our operations, including
our ability to pay dividends on our shares of common stock. Acquisition
financing may not be available on acceptable terms, or at all. In addition, we
may be required to amortize significant amounts of intangible assets in
connection with future acquisitions. We might also have to recognize
significant amounts of goodwill that will have to be tested periodically for
impairment. These amounts could be significant, which could harm our operating
results.

Risks Related To Our Common Stock

Our common stock may continue to have a volatile public
trading price and low trading volume.

The
market price of our common stock has been highly volatile. Since our initial
public offering in August 2000 through July 30, 2009, the price of
our common stock on the NASDAQ Global Market has ranged between $54.12 and
$1.05. The market has experienced significant price and volume fluctuations for
many reasons, some of which may be unrelated to our operating performance.

Many factors may have an effect on the market
price of our common stock, including:

While we cannot predict the effect that these
factors may have on the price of our common stock, these factors, either
individually or in the aggregate, could result in significant variations in
price during any given period of time.

Anti-takeover provisions in our governing
documents and under Delaware law and our shareholder rights plan may make an
acquisition of us more difficult.

We are incorporated in Delaware. We are subject
to various legal and contractual provisions that may make a change in control
of us more difficult. Our board of directors has the flexibility to adopt
additional anti-takeover measures.

Our charter authorizes our board of directors to
issue up to 1,000,000 shares of preferred stock and to determine the terms of
those shares of stock without any further action by our stockholders. If the
board of directors exercises this power to issue preferred stock, it could be
more difficult for a third party to acquire a majority of our outstanding
voting stock. Our charter also provides staggered terms for the members of our
board of directors. This may prevent stockholders from replacing the entire
board in a single proxy contest, making it more difficult for a third party to
acquire control of us without the consent of our board of directors. Our equity
incentive plans generally permit our board of directors to provide for
acceleration of vesting of options granted under these plans in the event of
certain transactions that result in a change of control. If our board of
directors used its authority to accelerate vesting of options, then this action
could make an acquisition more costly, and it could prevent an acquisition from
going forward. Our shareholder rights plan could result in the significant
dilution of the proportionate ownership of any person that engages in an
unsolicited attempt to take over our company and, accordingly, could discourage
potential acquirers.

Section 203 of the Delaware General
Corporation Law prohibits a person from engaging in a business combination with
any holder of 15% or more of its capital stock until the holder has held the
stock for three years unless, among other possibilities, the board of directors
approves the transaction. This provision could have the effect of delaying or
preventing a change of control of Dyax, whether or not it is desired by or
beneficial to our stockholders.

The provisions described above, as well as other
provisions in our charter and bylaws and under the Delaware General Corporation
Law, may make it more difficult for a third party to acquire our company, even
if the acquisition attempt was at a premium over the market value of our common
stock at that time.

Item 4 - SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS

We held our Annual
Meeting of Stockholders on May 14, 2009. The following represents the
results of the voting on proposals submitted to the stockholders at the Annual
Meeting:

(a)Proposal to elect Constantine E.
Anagnostopoulos, Henry R. Lewis and David J. McLachlan asClass III directors to the Board of
Directors, each to serve a three-year term until their successors are elected
and qualified.

There were no broker
non-votes or abstentions with respect to this matter.

Each nominee received a
plurality of the votes cast, and therefore has been duly elected a director of
Dyax. The terms in office of directors Susan B. Bayh, Henry E. Blair,
Gustav A. Christensen, James W. Fordyce, Mary Ann Gray and Thomas L. Kempner
continued after the meeting.

(b)Proposal to approve an amendment to Dyaxs
Amended and Restated 1995 Equity Incentive Planto increase the number of shares of Common Stock
available for issuance under the plan.

VOTES FOR

VOTES AGAINST

VOTES ABSTAINING

BROKER NON-VOTES

20,640,695

18,950,292

91,715

15,657,144

(c)Proposal to approve an amendment to Dyaxs
1998 Employee Stock Purchase Plan to increase thenumber of shares of Common Stock available for
issuance under the plan.

VOTES FOR

VOTES AGAINST

VOTES ABSTAINING

BROKER NON-VOTES

31,532,094

8,061,581

89,027

15,657,144

(d)Proposal to ratify the appointment of
PricewaterhouseCoopers LLP as Dyaxs independentregistered public accounting firm for the 2009 fiscal
year was

Amended and Restated
Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the
Companys Quarterly Report on Form 10-Q (File No. 000-24537) for
the quarter ended September 30, 2008 and incorporated herein by
reference.

3.2

Amended and Restated
By-laws of the Company. Filed as Exhibit 3.2 to the Companys Quarterly
Report on Form 10-Q (File No. 000-24537) for the quarter ended
September 30, 2008 and incorporated herein by reference.

4.1

Amendment No. 1 to
Rights Agreement, effective as of June 24, 2009 between American Stock
Transfer & Trust Company, as Rights Agent, and the Company. Filed as
Exhibit 4.1 to the Companys Current Report on Form 8-K (File
No. 000-24537) filed on June 25, 2009 and incorporated herein by
reference.

10.1

Amended and Restated
Loan Agreement between Cowen Healthcare Royalty Partners, L.P. and the
Company dated as of March 18, 2009. Filed herewith.

31.1

Certification of Chief
Executive Officer Pursuant to §240.13a-14 or §240.15d-14 of the Securities
Exchange Act of 1934, as amended. Filed herewith.

31.2

Certification of Chief
Financial Officer Pursuant to §240.13a-14 or §240.15d-14 of the Securities
Exchange Act of 1934, as amended. Filed herewith.

32

Certification pursuant to 18 U.S.C. Section 1350.
Filed herewith.



This Exhibit has been filed separately with the
Commission pursuant to an application for confidential treatment. The confidential portions of this Exhibit have
been omitted and are marked by an asterisk.

Amended and Restated
Certificate of Incorporation of the Company. Filed as Exhibit 3.1 to the
Companys Quarterly Report on Form 10-Q (File No. 000-24537) for
the quarter ended September 30, 2008 and incorporated herein by
reference.

3.2

Amended and Restated
By-laws of the Company. Filed as Exhibit 3.2 to the Companys Quarterly
Report on Form 10-Q (File No. 000-24537) for the quarter ended
September 30, 2008 and incorporated herein by reference.

4.1

Amendment No. 1 to
Rights Agreement, effective as of June 24, 2009 between American Stock
Transfer & Trust Company, as Rights Agent, and the Company. Filed as
Exhibit 4.1 to the Companys Current Report on Form 8-K (File
No. 000-24537) filed on June 25, 2009 and incorporated herein by
reference.

10.1

Amended and Restated
Loan Agreement between Cowen Healthcare Royalty Partners, L.P. and the
Company dated as of March 18, 2009. Filed herewith.

31.1

Certification of Chief
Executive Officer Pursuant to §240.13a-14 or §240.15d-14 of the Securities
Exchange Act of 1934, as amended. Filed herewith.

31.2

Certification of Chief
Financial Officer Pursuant to §240.13a-14 or §240.15d-14 of the Securities
Exchange Act of 1934, as amended. Filed herewith.

32

Certification pursuant to 18 U.S.C.
Section 1350. Filed herewith.



This Exhibit has been filed separately with the
Commission pursuant to an application for confidential treatment. The confidential portions of this Exhibit have
been omitted and are marked by an asterisk.